An Energy Efficient Mortgage (EEM) is a mortgage that rewards you for building or renovating a home with energy efficient features. EEMs allow borrowers to finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans. This allows them to qualify for a larger loan amount and a better, more energy-efficient home. Never heard of it? I am not surprised.
Its been a pretty well kept secret, but its not new. It started off as an FHA limited pilot program. Its success caused Congress to enact the national Energy Efficient Mortgage Program in 1995.
Participation in the program has been growing steadily as word gets out and the emphasis on energy efficiency continues to build.
The backbone of the EEM program is the idea that a reduction in a homeowner’s utility costs — by enacting changes that maximize energy efficiency — allows a homeowner to pay a higher mortgage to cover the costs of the energy improvements as well as the mortgage itself.
The FHA offers insurance for these specialized mortgages for a homeowner to buy or refinance a home and incorporate the cost of energy-efficient improvements. As the homeowner, you don’t have to qualify for the extra funds and no down payment is required.
EEMs offer homeowners who otherwise might not be able to afford it a chance to revamp their homes, save costs by adopting energy-efficient practices and help cut down on pollution. Yet, they’re still relatively foreign to most homeowners.
“Although EEMs have been available in some states since 1980, they have been little understood or marketed,” according to HUD. “With EEMs, borrowers do not need to get a separate, costly loan for energy improvements when buying an existing home.”
Here’s an overview of the requirements homeowners need to be considered eligible for an Energy Efficient Mortgage:
The borrower is eligible for maximum FHA-backed loan, using standard underwriting procedures. The borrower must make a 3-percent cash investment in the property based on the sales price. Closing costs are not included in the 3- percent calculation but may be used to satisfy the requirement. Any upfront mortgage insurance premium can be financed as part of the mortgage.
Eligible properties are one- to four-unit current and new construction.
The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the greater of 5 percent of the property’s value (not to exceed $8,000), or $4,000.
To be eligible for inclusion in this mortgage, the energy-efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report conducted by a home energy rating system or energy consultant. The cost of the energy rating may be financed as part of the cost-effective energy package.
The energy improvements are installed after the loan closes.
The maximum mortgage amount for a single-family unit depends on its location and it is adjusted annually.
There are three basic types of EEMs, so determining which one is best suited for your needs may require the help of an expert. Along with the FHA-backed loans for energy efficiency, the Veterans Administration also backs EEMs for qualified military personnel, reservists and veterans.
The mortgages are becoming more known and more popular as homeowners continue to look for meaningful ways to address rising fuel and energy costs. Take some time to evaluate your budget and whether the long-term cost savings associated with energy efficiency is something that’s right for you and your family.
To take advantage of these great energy efficient mortgage programs, talk to your mortgage broker today!
