New Mortgages for Car-Free Families

Location-efficient mortgages (LEMs) reward people who drive less—or not at all

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Regardless of how convenient you think walking, biking, and using mass transit are, one fact is inarguable: All are cheaper than a car. And if you're spending less getting around, doesn't that mean you have more money to spend on other things—like a house?

That's the theory behind the location-efficient mortgage (LEM), designed to reward home buyers for living in urban neighborhoods where shopping and working don't require driving. The LEM—now being introduced in 76 Chicago neighborhoods—alters mortgage bankers' underwriting rules to factor in money spent on transportation. A prospective home owner who chooses a house near mass transit, or in a community where day-to-day needs can be met without a car, qualifies for a bigger mortgage than under traditional financing formulas.

More importantly, a LEM may be the only way that lower-income buyers can become home owners in some urban neighborhoods. For example, a carless Chicago family of three making $40,000 annually would qualify for $151,000 with a LEM, versus $117,000 under a traditional mortgage. Savings are greater in the neighborhoods with better transit and nearby services.

LEM backers also hope that increasing the pool of buyers who can afford car-independent housing will encourage developers to build more livable communities. Meanwhile, existing neighborhoods would have more incentive to fight for transit and other amenities if LEMs bring more buyers and more opportunities to sell.

“We want to create a mortgage product that works in the private sector—not a subsidy, not a government program, and not to encourage people to use public transportation simply because it has some built-in virtue,” says Kim Hoeveler of the Center for Neighborhood Technology, one of the program's designers. “We've demonstrated [LEM principles] to some very tough bankers.”

Indeed, the LEM formula is solid enough to convince Fannie Mae, the federally backed mortgage underwriter, to participate.

Hoeveler is often asked about the freshly approved LEM borrower who celebrates by buying a new car. “There will be some who buy cars—in some cases for a good reason, because their job moves to the suburbs—but the formula accounts for that risk,” he says.