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Frequently Asked Questions

What is "Location Efficiency?"

Location efficient communities are neighborhoods where residents can walk from their homes to stores, schools, recreation, and public transportation. Residents of location efficient neighborhoods have less need to drive than people living in less convenient locations, so they save money on transportation costs.

Location efficiency is a measure of the transportation dollars people can expect to save by living in location efficient neighborhoods, based on the levels of population and public transit service in their communities.

What is a Location Efficient Mortgage®?

A Location Efficient Mortgage® (LEM) is a type of mortgage that recognizes the savings available to people who live in location efficient communities. LEM lenders count this available savings as additional income for people buying homes in location efficient communities. So people who might not otherwise qualify for a mortgage can become homeowners with a LEM, and qualified homebuyers can secure larger mortgages than would otherwise be available to them.

What are the basic features of a Location Efficient Mortgage®(LEM)?

The LEM is a fixed interest rate, 15-year to 30-year residential mortgage. The LEM requires a down payment of at least 3% of the appraised value of the property. The interest rates of a LEM are set in competition with prevailing market rates on the date a home is purchased. The LEM can be used to purchase owner-occupied single unit detached homes, condominiums, or town homes.

The LEM looks at a borrower's qualifying ratios in two ways. Before the savings available to residents of a location efficient community are counted, the LEM allows a maximum Housing-to-Income ratio of 35% and a Total Debt-to-Income ratio of 45%. After adding the savings available from location efficiency, the LEM allows a maximum Housing-to-Income ratio of 39% and a Total Debt-to-Income ratio of 50%.

The big difference between the LEM and a traditional mortgage is that the LEM uses available transportation-related savings and flexible qualifying ratios to add thousands of dollars of home buying power to the budgets of people shopping for homes in location efficient neighborhoods.

What kind of home can I buy?

The LEM can be used to buy owner-occupied condominiums, town homes, or single-family detached homes.

What will the LEM do besides increase buying power?

Aside from increasing a homeowner's buying power, this new mortgage will:

• Increase home purchases in a variety of location efficient communities;
• Boost public transit ridership;
• Support neighborhood consumer services and cultural amenities;
• Reduce energy consumption; and
• Improve local and regional air quality.

Who developed the LEM?

The LEM results from a three-year long research program led by three non-profit organizations: the Center for Neighborhood Technology, the Natural Resources Defense Council, and the Surface Transportation Policy Project. Together they have formed a new non-profit organization called the Institute for Location Efficiency (ILE). ILE's research was funded by the U.S. Department of Energy, the Federal Transit Administration, and the U.S. Environmental Protection Agency, as well as the Nathan Cummings Foundation, the Joyce Foundation, the John D. and Catherine T. MacArthur Foundation and the Surdna Foundation.

On the basis of ILE's research, Fannie Mae, the nation's largest source of home mortgage funds, sponsored a market test of the LEM. In consultation with ILE, Fannie Mae defined the guidelines of the current LEM mortgage product, agreed to invest at least $100 million in LEMs, and authorized lenders to issue LEMs in four metropolitan market areas. ILE and its member organizations continue to work with Fannie Mae in the distribution of the LEM in these four test markets.

Where is the LEM available?

The LEM is now available in the metropolitan areas of Chicago, Los Angeles County, the San Francisco Bay, and the city of Seattle. Please see the linked LEM web site of each of these urban areas for the metropolitan boundaries within which the LEM is available.

Where should a home be located to achieve significant benefits with a LEM?

You could use the LEM to purchase a home in neighborhoods throughout the four metropolitan areas listed above. However, the LEM's increased buying power depends on the extent to which each neighborhood is location efficient. That means that there will be a difference in potential savings and LEM buying power from place to place. Indications of location efficiency for a particular home include the number of businesses and other amenities within walking distance, proximity to bus stops and/or train stations, and the frequency of service from nearby buses or trains. On each web site, you can use the LEM Worksheet to find out how much additional homebuying power you have with the LEM for any given community area or address.

Where can I apply for a LEM?

How does the LEM increase my buying power?

Research has shown that people who live in location efficient neighborhoods own fewer cars per household and drive fewer miles than people who live in more spread out or rural areas. This is because they don't need a car as often. The total vehicle miles traveled by a household are also affected by income and household size. The LEM's computer program can measure this difference and predict the savings that will result from living at a particular location efficient address rather than in a significantly less convenient location.

The LEM's underwriting standards allow this savings to be taken into consideration. The savings is added to household income in the qualifying ratios, and the ratios themselves are more liberal. The result is that the LEM enables borrowers to qualify for a larger mortgage, as long as they meet the other requirements.

What are the LEM's requirements?

The LEM includes standard criteria to evaluate qualified applicants:

• Credit and income history;
• Employment history and stability; and
• Debt-to-income ratio calculations used in the application process.

Are there other requirements?

Borrowers must participate in, pre-purchase counseling about homeownership and location efficiency. Borrowers are encouraged to shop locally and use public transit as often as possible. Finally, borrowers are asked to participate in an annual survey conducted by the Institute for Location Efficiency, the non-profit organization that researched and developed the LEM.

LEM borrowers are not restricted in any way from owning cars or using them as they like. However, if you finance a home with a LEM, you should realize that you have received a large mortgage because your home is in a neighborhood where car ownership and driving can be reduced. To finance a home with a LEM and then ignore the benefits of a location efficient neighborhood by owning multiple cars and driving them heavily would be financially unwise.

How can I find out whether the LEM will help me buy a home in my favorite neighborhood?

On each city's website, you can use the LEM Worksheet to select a community area or enter an address, along with several items of information about your household. The LEM Worksheet will then calculate the maximum level of savings from location efficiency that is available to you at that location. You can use this function to "shop" for a location efficient community that is attractive to you. In some locations additional financial incentives are available to people who finance their homes with a LEM; see the linked web site for your metropolitan area for incentives that may be available to you.

Location Efficient Mortgage is a registered trademark of the Institute for Location Efficiency, a California Not-For-Profit organization.
© Copyright 2002-2003 Institute for Location Efficiency. All rights reserved.
For more information about the LEM contact: The Institute for Location Efficiency (ILE) at 614-237-3815
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