Improve Your Property With An Energy Efficient Mortgage (EEM)

What Are Green Loans For Homes?

If you want a house that costs less to heat or cool, consider financing with an energy-related home loan. One of the least-understood mortgage products, the Energy Efficient Mortgage, aka the green mortgage, can help make your house more comfortable, affordable and valuable.

How Does An Energy Efficient Mortgage Work?

The Energy Efficient Mortgage, or EEM, allows you to either finance an energy-efficient home make a property more energy-efficient.

If you purchase an energy-efficient house, the EEM offers more flexible underwriting. You can borrow more, because the energy savings make the home more affordable than it would be without the improvements.

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For homes that must be retrofitted to use less energy, you can use an EEM to add the cost of approved energy improvements to a mortgage without increasing your down payment.

Your loan amount will be larger. However, you get to stretch your debt-to-income ratios, because the lenders consider the savings you’ll get from the proposed upgrades.

Improvements

You can use an EEM only for approved renovations that reduce your monthly energy bills. Allowed improvements include those below. However, many other projects qualify.

• solar water heaters
• solar heating and cooling systems
• caulking and weather-stripping
• certain furnace efficiency modifications
• clock thermostats
• new or additional ceiling, attic, wall and floor insulation
• water heater insulation
• storm windows and/or doors, including thermal windows and/or doors
• heat pumps
• vapor barriers

EEM Requirements

Typically, you need a home energy evaluator to conduct a home energy rating (also known as a HERS report, for Home Energy Rating System). The cost for this service runs about $300 to $450, according to USA HERS Energy Rating Service.

The rating estimates the monthly energy savings and the value of the energy efficiency improvements, or the Energy Savings Value.

Types Of EEMs

You can find EEM and EIM programs for government-backed loans like FHA and VA. Government-sponsored enterprises Fannie Mae and Freddie Mac also make provisions for energy-efficient houses. However, their products and guidelines differ from the government-backed offerings.

Conforming EEMs

Conforming EEMs expand your purchasing power by adding your estimated energy savings to your qualifying income.

Freddie Mac does not offer EEMS, but their loans all allow applicants to borrow more for an energy-efficient property than for other homes.

Fannie Mae does offer EEMs. Its HomeStyle® Energy loan lets homeowners finance new energy improvements or pay off debt they incurred to increase the efficiency of their homes.

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Unlike government-backed EEMs, the conforming program allows you to finance improvements on investment or vacation homes.

HomeStyle Energy allows you to use up to 15 percent of the “as completed” appraised value of the property for new energy improvements. You can do this when purchasing or refinancing your home.

If your home, after improvements, is worth $200,000, you could borrow $30,000 on top of your purchase or refinance loan to make energy improvements. You can add the EEM to almost any Fannie Mae mortgage product.

FHA Energy Efficient Mortgages

You can add the cost of approved energy improvements to your FHA loan amount without running afoul of FHA loan limits. The maximum amount of the portion of the EEM for energy efficient improvements is the lesser of five percent of:

• the value of the property, or
• The FHA loan limit in your area, or
• 150 percent of the conforming limit.

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For example, in Reno, NV, the FHA loan limit is $345,000, while the conforming loan limit is $ for a single-family home. If you finance a $400,000 house, you can add energy improvements up to the lesser of:

• $20,000 (5% of $400,000)
• $17,500 (5% of $345,000)

In this case, you’d calculate the maximum amount from the FHA loan limit. You can add $17,500 in improvements to your loan.

Energy improvements financed with an EEM must be cost-effective. This means the expense of adding them is less than or equal to the energy savings they create.

VA Energy Efficient Mortgages

Eligible military personnel, reservists and veteran can use the Veteran’s Administration (VA) EEM for energy improvements when purchasing or refinancing an existing home.

Energy Efficient Mortgages For VA Borrowers

You can increase your purchase or refinance loan by up to $6,000 for qualified improvements any time before closing, without additional approval from the VA. Like FHA EEMs, your improvements must be approved and cost-effective.

• If the cost of improvements is $3,000 or less, the lender may add the needed amount to your VA mortgage without additional underwriting.
• If improvements cost $3,000 to $6,000, the lender must make sure the increase in your monthly payment will be offset by energy savings. For example, a $6,000 EEM with a 30-year loan at 4.0 increases your mortgage payment by $29. Your improvements should reduce your energy costs by at least $29.
• For improvements costing more than $6,000, the lender must determine that the reduction in energy costs will offset the addition to your mortgage payment. It must make sure that you can afford the higher mortgage payment, and that the improvements will increase your property value by at least the amount of the EEM.

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You can complete your improvements before or after closing. To be reimbursed for completed energy improvements, you must have finished the project no more than 90 days before closing the EEM.

For improvements that will be completed after closing, the lender holds EEM funds in escrow until the work is done. All work should be finished within six months of closing.

What Are Today’s Mortgage Rates?

Happily, current mortgage rates are still low. However, rates and housing prices have been rising, and experts anticipate them to continue the trend.

Because EEM loans are some of the cheapest way to finance home improvements, consider adding one when you buy an energy-efficient house, or purchase one that needs upgrading.