More Like This...

Recent Posts


Demystifying the Location Efficient Mortgage

Mar 16, 2010

by Amanda Bryan, Intern Architect at VIA Architecture

Like many other young people just setting down roots and trying to grasp the finer details of what it means to be in the ‘real world’ (a.k.a. no longer a student), I found myself feeling rather ignorant when people started bringing up topics like mortgages and prequalified buyers – let alone ‘location efficient mortgages.’ However, I am apparently not the only one who is at a loss on this topic since there seems to be a general lack of knowledge on the subject. So what exactly is a Location Efficient Mortgage and why is it worth knowing about?

What is a ‘Location Efficient Mortgage’ and why does it exist?
A Location Efficient Mortgage (LEM) is a type of mortgage created for homebuyers to incentivize purchases made in urban areas that accommodate walking to nearby stores, schools, parks, and public transit. At the consumer level, the LEM provides more opportunities for low and middle income homebuyers, who would ordinarily be forced to live in less expensive fringe areas, to buy into transit and amenity rich areas. At the broader national level, these loans satisfy four overarching goals:

  1. Boost public transit ridership
  2. Reduce energy consumption
  3. Improve local and regional air quality
  4. Encourage development of more efficiently designed communities

How is an LEM different from any other mortgage?
In many ways an LEM is similar to a standard Federal Housing Administration (FHA) loan because it specifically targets borrowers that struggle to amass a traditional 20% down payment by allowing a reduced down payment of only 3%. Like FHA loans, LEMs also allow borrowers to ‘stretch’ their Housing-to-Income and Debt-to-Income ratios, traditionally set at 28% and 35%, to an increased rate of 35% and 45% respectively.

However, an LEM is different from an FHA loan in a couple of ways. First, an LEM is predicated upon a homebuyer’s selection of a neighborhood which allows them to reduce their vehicle driving needs by incorporating a diverse set of amenities such as grocery stores, parks, and transit within walking distance. Second, a mathematically derived ranking system for urban neighborhoods coupled with a buyer’s borrowing power is used to determine their Location Efficient Value (LEV). The LEV can then be calculated into a buyer’s gross income, thereby increasing their prequalification amount. To see how this process works in real time go to:

What research prompted the creation of LEMs?
In a 1989 study by Peter Newman and Jeffery Kenworth, it was found that gasoline consumption in U.S. cities far exceeded that of 32 other major international cities. For example, Americans consumed nearly twice as much gasoline per capita as Australians, four times as much as compact European cities, and ten times as much as westernized Asian cities.[1]

A comparison of American’s gasoline consumption in relation to three other westernized cultures.

Another way to understand how auto ownership figures into the Location Efficient Mortgage is to understand the financial impacts due to foreclosures. The NRDC performed the “Location Efficiency and Mortgage Default” study which pulled highly detailed performance data on 40,000 mortgages in Chicago, Jacksonville, and San Francisco. After accounting for factors such as income, age of mortgage, and population growth, the study shows that the probability of mortgage foreclosure decreases in neighborhoods where less car reliance is possible.[2]

Comparative analysis showing the relationship between transportation costs and location efficiency (link)

What does this all mean for the average homebuyer and our urban condition?
While the LEM may not be the absolute answer for driving consumers toward purchasing in urban areas (described more in depth here), it does have the potential for opening up a more efficient and progressive housing market for the younger generations like myself. If the LEM can build up enough critical mass, attracting homebuyers to areas of smart growth augmented by great transit connectivity, there is the potential for our cities to regain the social amenities critical for livability. As for those of us wishing we could afford a home close to work, play, and everything else in-between, there might be a small glimmer of hope.


One Comment

  1. Great information, and a terrific post! Housing affordability and transit efficacy is a huge problem. Price increases have driven many toward outlying areas, and clearly the ‘real’ costs of commuting simply amplify and amortize the long term cost of suburban living.

    I’d be curious to know if there’s been any credible study of Location-Efficient Rent Subsidies? In many dense world cities, ownership is low or declining, commensurate with the high costs of owning – both direct and ancillary. It’s easy for me to imagine a future of incentivized renters, rather than owners.