Prospective homeowners who want to enjoy higher energy efficiency savings and possibly afford a larger mortgage have a great option – the Energy Efficient Mortgage (EEM).
An EEM is a mortgage that credits your home’s energy efficiency into the home loan itself. An EEM gives you the chance to finance energy-saving measures into one mortgage. Debt-to-income qualifying ratios on EEMs are increased so you can borrow a larger amount and enjoy a more energy-efficient home.
You can choose an EEM when you purchase a home. You also can get an EEM when you already own a home, want to refinance, and add energy-efficient improvements.
Are you interested in an EEM? Learn all about these innovative mortgages below.
What Are EEMs Used For?
EEMs usually are offered on homes that are energy efficient already – one example is an ENERGY STAR-certified home.
They are a good choice for homebuyers and homeowners mostly concerned with the long-term value of their home. People who have enough tax liability to take advantage of the tax-deductible interest also choose EEMs.
An EEM usually requires a home energy rating to give the mortgage lender the estimated monthly savings and value of the new energy efficiency modifications. This is called the Energy Savings Value. The FHA and VA offer EEMs, and some conventional lenders also offer them.
An Energy Efficient Mortgage offers many benefits for buyers, sellers, and remodelers and refinancers:
- You may be able to qualify for a larger mortgage on an energy-efficient home. For example, if your gross monthly income is $5,000 per month, the most mortgage you can usually qualify for is approximately 29% of your monthly income, or $1,450. The maximum mortgage is only $207,000.
- Maximum payment may increase to 33% of your monthly income, or $1,650. The maximum mortgage is $235,900. This much larger mortgage allows you to easily finance energy-efficient improvements.
- Enjoy a more comfortable and energy-efficient home for as long as you live there. With such improvements as an energy-efficient air conditioner and double-paned windows, for example, your home will be cooler and quieter. Buyers also enjoy cost savings on their energy improvements from the first day of ownership.
- May increase the potential resale value of the home with your energy savings. More Americans today value energy efficiency and may be willing to pay more for a home with energy efficiency already built-in.
- Americans value energy efficiency more than ever, so you may be able to sell your home faster.
- The home is more affordable to own over the years, with many homeowners reporting hundreds or thousands of dollars of energy savings per year.
- Energy-efficient homes attract more attention in a hot real estate market.
For Remodelers and Refinancers
- Enjoy the lower cost savings of an energy-efficient home without moving when you remodel or refinance.
- Make home improvements that save you on your monthly electric bills.
- The value of your home may increase, which helps when you decide to refinance again or sell.
How to Get an Energy Efficient Mortgage
To qualify for an EEM on your home loan, a home energy assessment is required.
The assessment provides recommendations on how to improve the home’s energy efficiency. The home energy assessment estimates how much money will be saved annually in energy costs, as well as the cost of the improvements.
The home lender is required to use the information from the home energy assessment to determine how much you will save in energy costs with the improvements.
Types of Energy Efficient Mortgages
A conventional EEM boosts the buying power of purchasing an energy-efficient home by allowing the conventional lender to boost the borrower’s income by a dollar amount that equals the estimated energy savings.
Freddie Mac does not provide EEMs, but they do allow some underwriting flexibility for energy-efficient home improvements.
Federal Housing Administration (FHA)
The home loan amount for an FHA EEM can be boosted by the cost of the energy improvements in the home. The maximum amount of the EEM for energy improvements is the lesser of 5% of:
- The value of the home;
- 115% of the median area price of a single-family home, or
- 150% of the conforming Freddie Mac limit
You do not need to make an additional down payment to qualify for an FHA EEM, and FHA loan limits are not an obstacle to getting an EEM. FHA EEMs can be obtained for site-built and manufactured houses.
Department of Veteran’s Affairs (VA)
The VA EEM is available to active military, reservists, and veterans to make energy improvements when they buy an existing house. The VA puts a cap on energy improvements at $3,000 to $6,000. Borrowers should speak to their VA lender about a VA EEM at the start of the lending process.
Energy Efficient Mortgage Case Study
A family decided to refinance their 35-year home to lower their interest rate on their FHA loan. Their mortgage provider suggested they get an energy assessment on the house so they could finance their energy improvements in the new mortgage.
The lender boosted the FHA loan value by $8,760 to cover the energy improvement costs. The final loan was $176,400, which was higher than they could get before. Home improvements included:
- Double-paned windows
- Wall insulation
- Ceiling insulation
- Furnace duct repairs and insulation
These improvements, combined with the lower interest rate, gave the couple $230 per month in savings. They also reported the home is quieter, more comfortable, and they hardly needed to use the furnace in the winter.
The Bottom Line
Getting an Energy Efficient Mortgage makes a lot of sense. You can finance energy-efficient improvements into your home, get a larger mortgage, save on energy costs, and increase the resale value of your home. Talk to your lender about an Energy Efficient Mortgage today and see what you can save.
- Energy Efficient Mortgages. Retrieved from https://www.energystar.gov/newhomes/mortgage_lending_programs/energy_efficient_mortgages
- Energy Efficient Mortgage Program. Retrieved from https://www.hud.gov/program_offices/housing/sfh/eem/energy-r
- Energy Efficient Mortgage Homeowner Guide. Retrieved from https://www.hud.gov/program_offices/housing/sfh/eem/eemhog96