The FHA and VA offer the Energy Efficient Mortgage program. This program enables you to roll the cost of certain energy efficient changes into your mortgage. You do not have to take out another loan or secure a separate approval. You can use it on a home you purchase or your own home during a refinance. The renovations must be cost effective and energy efficient in order to qualify.
Determining the Costs you Can Include
The FHA and VA require borrowers to employ a home energy assessor. This professional will help determine which energy efficient changes you can make. They perform an analysis to help you see what you can save with the various changes. You can include the cost of the equipment as well as the labor and inspections necessary.
The main requirement in all of this is that the changes are cost effective. This means that you will see savings from the changes during a normal lifespan. Basically, you must be able to save more than the changes will cost you upfront. The energy assessor can help you determine these numbers to see if they make sense. If you buy a new home, the energy assessor can determine if the improvements exceed the International Energy Conservation Code requirements.
If your costs are low enough, you may not have to seek approval for the changes. In most cases, changes less than $3,000 are automatically approved. Lenders do not look at how much you will save monthly with changes for this amount. Changes between $3,000 and $6,000 may prompt the lender to look into your monthly savings to make sure the changes are worth it. Any changes over $6,000 definitely require an in-depth analysis of your savings. They just want to ensure that the cost is worth the savings.
Examples of Changes you can Make
There are hundreds of energy efficient changes you can make to your home. Following are the most common FHA and VA approved changes:
- Installation of solar water heater or HVAC system
- Weather stripping
- New insulation
- New storm windows/doors
- Addition of programmable thermostats
Qualifying for the EEM
The Energy Efficient Mortgage is one loan. You receive the money to buy or refinance your home plus the money for the energy efficient changes. However, you do not have to qualify for the higher loan amount. You only must qualify for the portion of the loan to buy/refinance the home. The EEM portion of the loan is automatically approved.
This means on an FHA loan, you would need to meet the following for the majority of the loan:
- Credit score of at least 580
- Debt ratios of 31/43
- Stable income
- Down payment of 3.5% or 97.5% equity
- Appraisal that passes FHA requirements
Qualifying for a VA loan means:
- Credit score of at least 620
- Adequate disposable income each month
- Total debt ratio not to exceed 43%
- Appraisal that passes VA requirements
Once you qualify for the VA or FHA loan, you may qualify for the energy efficient changes. You can finance the lesser of the 5% of:
- The value of the property
- 115% of the average price of a single family home in your area
- 150% of the Freddie Mac current limit
You will not have to put down a larger down payment to account for the higher loan amount. You are only required to put down 3.5% of the sales price if you use an FHA loan. If you use a VA loan, you will not need a down payment at all.
Paying for the Changes
A rare aspect of the EEM is you can make the changes before you apply for the loan. You have up to 90 days to apply for the EEM then. If you did the work within 3 months, the lender will reimburse you for your costs at the closing. If you are in the middle of the work when you close on the loan, you will receive reimbursement after you complete the work. All work must be done within 6 months of the loan’s funding.
The FHA or VA EEM program is often well worth the money. Not only do you save money on your utility bills, but you help the environment. It may increase your mortgage payment slightly, but it will help your utility bills in the end. Not only will you lower your utility bills, though, you may also decrease the wear and tear on your utilities. This could provide you with even greater savings in the end.