Big Blue Goes Green - How 203Ks May Be the Future of Green Mortgages

When Sarah Coleman and Carl Sack first saw “Big Blue,” they knew they were home.  The massive house, so named because all the rooms were painted shades of the color, was built in the 1920s on two and a half lots in the Corey-Merrill neighborhood of inner-city Denver.  


But their Realtor, PJ Magin, remembers the 4,200-square-foot place was a gut job – the roof was shot, the hardwood floors wrecked, a detached garage needed scraping, and an old “octopus” boiler appeared to have been recently coal-fired by the foreclosed-upon owners because the house had no power. 


The bank initially listed the place at $789,000, and the couple put in an offer of $245,000 in winter 2011.  Their first lender backed out one day before closing, and the bank gave the couple a small window to resuscitate the deal when Magin recommended working with mortgage lender Brett Popish.  Because Coleman and Sack had done the heavy lifting for the previous lender, including getting bids, Popish was able to fund and close in two weeks.


The 203K loan product Popish used funded $163,000 of conventional improvements like a new roof, historically right-on windows to replace the 60 single-pane original ones, and rewiring the house.  More importantly, the loan also funded “green” upgrades like a high-efficiency furnace and sealed ductwork, tankless, “on-demand” hot water heating and ENERGY STAR appliances.  And Popish, who’s a 203K veteran at Universal Lending Corporation, says homeowners are more and more choosing the loan for green upgrades to existing homes in both purchases and refis.


The beauty of the 203K is that it’s agnostic about what’s green and what’s conventional.  Viewed through the 203K lens, granite countertops are weighted the same as high-efficiency furnaces as new carpet as low-VOC paint as structural repairs as solar panels (owned, not leased).  The mortgage underwriter can fund up to 110 percent on the “as-completed value” of the purchase price ($245,000 in the case of Coleman and Sacks) plus the improvements ($163,000) up to the conforming loan limit ($408,000 in the City and County of Denver in June 2011).


The 203K is essentially a construction loan and a purchase loan rolled into one, and the FHA, its guarantor, estimates they’re two percent of the entire FHA portfolio.  The loan comes in two flavors – a streamlined loan up to $35,000 in non-structural repairs, and a full up to a county’s conforming loan limit.  Coleman and Sack opted for the latter, given the massive overhaul that the house required.


The loan also solves a couple of problems that existing “energy-efficiency mortgages” (EEMs) have.  EEMs require a HERS rating, a “miles-per-gallon” metric assigned to a home, and those start at $500 and go up depending on square footage.  The math behind a HERS rating generates the net present value of future energy savings based on a prescribed scope of work.  Vary outside of that complex calculus, and you’re on your own.


Secondly, the 203K is a less-complicated product to use as long as everyone’s on board from the gitgo, says Mike Wilcox, Renovation Sales Manager at Academy Mortagage, which specializes in the loan.  He only recommends using 203K-seasoned contractors, and he has a “come-to-Jesus” meeting before closing to insure buy-in. 


“This is not a program to guess at,” he says, noting that its legendary complications usually come when contractors aren’t schooled in the draw process.  “The most important thing for everybody to know is who to call – from the contractor to the lender to the FHA consultant.”


The loan product gets a bad rap among real estate professionals because it has the reputation of financing houses that are in shambles.  Not so, says Popish. 


“With a 203K, you can do something as small as an appliance package, just putting new appliances in a home,” he says.  (Energy-efficient, please!)  “Or buying a home, scraping it and building a new home on the foundation.”  The numbers simply have to pencil out – green or not.


“I don’t know why every loan isn’t a 203K,” Wilcox says.  Even simple jobs like repainting and recarpeting can be rolled into the price, adds Popish.  The work simply has to be bid beforehand and weighed in the appraisal value.


Popish says 203Ks are also popular with experienced lenders because the properties go into default significantly less than homes financed with other loans.  “Anyone fixing up their home to make it a dream home, they’re far less likely to default,” he says.  (Which begs the question – Are “green” borrowers better credit risks?  Let’s start watching for data to support that.)


Coleman says she and Sack don’t consider themselves hardcore enviros.  She’s an accountant, and he’s a financial analyst so both live decidedly in the realm of the left-brained.  “The greenest thing I did was buy this house and not scrape it,” she says.


Still, they chose high-efficiency systems, reused building materials when possible and have put a herculean amount of sweat equity into Big Blue, including a lot of repainting.  “We aren’t consciously buying something green, but we make important decisions whenever we can.”  The 203K helped them get there.

-Melissa Baldridge

For more information ...

The Web site provides a spot to source good contractors familiar with the 203K process. 

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Tags: 203K, Baldridge, Brett, Carl, Coleman, EEM, Melissa, Mike, Popish, Sack, More…Sarah, Wilcox, building, eGreenContractors, energy-efficiency, green, mortgage


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Comment by Melissa Baldridge on April 5, 2012 at 4:34pm

As I mentioned, I'm curious and eager to see if data starts supporting that people making these improvements, especially green ones, really are better credit risks.  That would be yet another bonus for green building.

Comment by Jason Payne on April 5, 2012 at 3:56pm

Thanks for the mention Sean. Lots of good information being shared in the article and in the comments. Combining the 203(k) and the EEM, as Brad pointed out, is really the best of both worlds. The only potential drawback is the 203(k)s are typically considered more risky by investors, and carry an uptick in the interest rate of 0.5% - 1% higher than a standard loan. EEMs do not have this additional interest. Although there are a few investors who may add 0.125% to cover the perceived risk.

We're working with a homeowner in NY that is combining the 203(k) with the EEM and has over $50,000 to use solely for a deep energy retro-fit.

Comment by Melissa Baldridge on April 3, 2012 at 9:34am

Thanks, Gary.  What a cool meshing of capabilities - rater & 203K consultant.  Thanks, everyone, for being out there and doing the good work, 'helping homeowners move into higher efficiencies and better building solutions.  'So grateful for all of you.. 

Comment by Gary Smith on April 3, 2012 at 8:49am

Good job Melissa! I am a 203K Consultant, I recommend energy smart rehab features and as a rater I know and understand the value of the EEM. We need more articles from professionals who recognize that there are alternatives to traditional energy audit funding. Thank you for sharing... 

Comment by Melissa Baldridge on April 2, 2012 at 12:56pm

Hi Brad, I stand corrected.  There are no official 203K-certified contractors.  That said, there's a Web site called that Mr. Wilcox recommends owners to. 

And I totally get your selling comfort.  But if (younger) people aren't even identifying as "green" or are overtly aligning themselves with having a more energy-efficient house, they may not find raters or energy auditors like us who can steer them to better solutions, or see the need for a HERS score.  Or even know what one is.  So I'm all for another solution that may catch homeowners and help them get renos that save energy. 

Comment by Brad Brinke on April 2, 2012 at 11:48am

Melissa, people using a 203K loan care about updating the kitchens, bathrooms, roofs and other features in the home.  A person using an EEM is under the guidance of a HERS rater that will tell them how to make the home more efficient.  I don't need people to "buy green", I need them to understand comfort.  Yes, you can update your furnace and put new windows in, but is your 203K consultant going to tell you about air sealing top plates, or how to size HVAC equipment, or even that making these improvements are even worth it? The 203K does not get people into smarter homes, it gets them into homes they want while making any improvement they want, be it efficient or not.  There is a great market for EEM's, I do them weekly.  There is also a great market for 203K loans, and we also service them.  I even do them together!  The 203K takes care of the new roof, kitchen, widows...and the EEM takes care of air sealing, insulating, duct sealing and HVAC replacement, its the best of both worlds.

Comment by Melissa Baldridge on April 2, 2012 at 9:26am

Brad, Mike Wilcox has worked 203Ks with EEMs, and he says it's rough - basically the results have to come back in identically so the work scopes are aligned.  Actually, that could be an interesting set of skills for someone -- HERS rater and FHA consultant.  'Two birds ...

Sean, the advantage of the 203K versus a HERS rating with specified scope of work is flexibility.  The homeowner decides what improvements will be made.  There's a great study by ad giant Ogilvy & Mather called "Bridging the Gap" that addresses the industry problem - getting people to buy green, ,or in this case make green upgrades.  In essence, even younger people (like the couple I interviewed here, both in early 30s) don't see themselves as "green" or enviros.  They do want to make good choices, however.  I'm all for ANYTHING that gets owners into smarter homes with smarter systems.  The 203K does that. 

Comment by Sean Lintow Sr on April 2, 2012 at 12:23am

Hmmm, so paying X amount for a 203k consultant is good, but paying a rater is bad... interesting take and yet oh so short sighted. As Brad alludes to those two programs can be tied together, and not all the EEM options require a rater. You might want to talk to Jason Payne @ EEM Training

By the way, there is no such thing as a 203k approved contractor - the FHA only approves lenders & the consultants. While some banks may have a list & some websites have popped up offering that service, they are not approved by the FHA, HUD, or the program itself. With that said, the program has a few quirks & some contractors can get in trouble quick if they do not understand how it works & budget accordingly.

Comment by Brad Brinke on April 1, 2012 at 11:26pm

The loan also solves a couple of problems that existing “energy-efficiency mortgages” (EEMs) have.

Does not sound like he pairs them with EEM's.  

Comment by Melissa Baldridge on March 27, 2012 at 11:11pm

OK, all you EE people - here's yet another option to get homeowners to move into energy-efficient retrofits.  Find good 203K providers in your area, and get after it.  Best wishes!

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