Many homeowners spend thousands of dollars a year on energy bills and pay considerable amounts in monthly utility payments. Energy-efficient mortgages (EEMs), sometimes referred to as a green mortgage, provide a handy way for current and prospective homeowners to finance the cost of energy-efficient upgrades in both new and existing homes while being more eco-friendly and enjoying significant cost savings.
What Is An EEM?
An EEM is a financial loan that provide added funds you can apply to make finance energy-saving enhancements that are included as part of your home mortgage or refinancing.
In effect, an EEM is designed to help you finance eco-friendly home upgrades or the purchase of homes that produce significant savings on your monthly utility bills by helping you go greener. Likewise, it’s also crafted to help you afford green improvements that can benefit the planet and help you reduce your overall energy consumption footprint.
When An EEM Is a Good Choice?
EEMs are typically best suited for homeowners who look for long-term value over time. Likewise, they’re also a popular choice with buyers who want to invest in home solar panels and other cost-effective technologies that require greater investment. Individuals wishing to enjoy cost savings on utility bills may also wish to apply for an EEM loan.
What Do EEMs Finance?
An EEM can be used by borrowers to purchase or refinance a home that is already energy efficient, such as an ENERGY STAR certified home, or to finance energy efficient improvements to a new or existing home. An EEM takes into account the cost savings that accrue to the homeowner as a result of lower utility bills. The value of utility savings is used by the lender to provide more favorable financing terms to the borrower, such as a better debt-to-income qualifying ratio that enables the borrower to qualify for a larger loan amount and a better, more energy-efficient home.
To obtain an EEM a borrower typically must have a home energy rater or other trained professional conduct a home energy assessment or rating before financing is approved. This assessment verifies for the lender that the home is energy-efficient or will be energy efficient after energy efficient improvements are completed and provides the lender with the estimated monthly energy savings and the value of the energy efficiency measures — known as the Energy Savings Value.
There are many examples of energy-saving upgrades that can be financed using an EEM. Be mindful that not all renovation needs qualify for all EEM types. However, the following are types of examples of expenses and home upgrades that can generally be financed with an EEM:
- Energy-efficient appliances (refrigerators, washers, dryers, etc.)
- Energy-efficient windows and panes
- Furnaces and heat pumps
- Assorted heating and cooling systems (solar, etc.)
- Weatherization treatments
- Water heaters and heater installations
- Caulking and weather stripping
- Duct system repairs and installations
- Home insulation (walls, floors, attic, etc.)
- Select roofing improvements
Types Of EEM Programs
Several different EEM loan programs are available to home buyers, each of which come in different forms and with different features attached. EEMs are sponsored by federally insured mortgage programs (FHA and VA) and the conventional secondary mortgage market. Lenders can offer conventional EEMs, FHA EEMs, or VA EEMs.
Conventional Energy Efficient Mortgage
Conventional EEMs are the most generous of all EEM loan types and will likely increase a borrower’s purchasing power when making energy efficient upgrades to their home at the time of purchase or refinance. Obtain one, and you can borrow the amount that you qualify for under a conventional mortgage plus up to 15% of a home’s appraised value for use on energy-efficient improvements.
Fannie Mae’s HomeStyle® Energy mortgage allows borrowers to make upgrades to reduce utility costs and improve the comfort and safety of their homes by financing energy improvements directly in a purchase or refinance mortgage. Upgrades may also include solar, geothermal, or wind power. Borrowers may also use HomeStyle Energy to pay off existing energy debt, including but not limited to PACE loans. Learn more about the benefits of an energy-efficient home here.
Freddie Mac's GreenCHOICE Mortgage® allows borrowers to finance energy efficient improvements with any mortgage product, property type and financing terms up to 30 years to provide affordable financing opportunities and greater purchasing power despite higher debt-to-income and housing expense-to-income ratios for manually underwritten loans.
Federal Housing Administration (FHA) Energy Efficient Mortgage Program
FHA’s Energy Efficient Mortgage program (EEM) insures a borrower’s FHA-insured mortgage used to purchase or refinance a principal residence, and the cost of energy efficient improvements to be made on the home. The borrower only needs to qualify for the loan amount used to purchase or refinance a home and does not need to qualify for the portion of the loan to be used to finance the energy efficient improvements. The energy efficient improvements that are financed must be evaluated to be lower than the amount of energy savings to be realized and can include the cost of materials, labor, inspections, and the cost of a home energy assessment by a qualified energy assessor (a home energy assessment must be done). The maximum amount of the energy efficient improvements that can be added to the borrower’s regular FHA loan amount is the lesser of:
- The cost of the energy efficient improvements to be made based on a home energy assessment; or
- the lesser of 5 percent of:
- The Adjusted Value;
- 115 percent of the median area price of a single-family dwelling; or
- 150 percent of the national conforming mortgage limit.
Applications for an FHA EEM may be submitted to the local HUD Field Office through an FHA-approved lending institution. HUD has a searchable list of approved lenders . Additional information about the FHA EEM can be found on FHA's web site .
FHA’s EEM program is available for site-built as well as manufactured homes. The Systems Building Research Alliance has information about FHA EEMs for ENERGY STAR certified manufactured homes.
Veterans Affairs Energy Efficient Mortgage
A U.S. Department of Veterans Affairs (VA) -backed EEM is available to qualified military personnel, reservists, veterans, and qualifying spouses for energy improvements when purchasing an existing home. As a general rule, energy-efficient improvements can total no more than $6,000 on top of the approved VA loan amount. In addition, homeowners are required to complete any energy-efficient improvements within 6 months of closing on the home. Chapter 7 of VA Pamphlet 26-7 (Revised) (PDF, 1.4 MB) contains lender guidance on the VA EEM. For more information about VA loans please visit the VA’s web site.
USDA Single Family Housing Guaranteed Loan Program
The U.S. Department of Agriculture's (USDA) Single Family Housing Guaranteed Loan Program assists approved lenders in providing low- and moderate-income households the opportunity of homeownership in eligible rural areas. Eligible applicants may purchase, build, rehabilitate, improve or relocate a dwelling in an eligible rural area with 100% financing.
EEM Eligibility Requirements
Homeowners must meet several requirements to be approved by a qualified EEM lender. These include but are not limited to qualifying for an EEM under minimum credit requirement and documentation guidelines while ensuring that energy-efficient improvements are cost-effective. In practice, this means that the total cost of the improvements that the home buyer seeks to make will be less than the reduction in overall costs that can be enjoyed in energy savings over the expected life of these improvements.
To this extent, an energy consultant must prepare a home energy rating report that estimates potential energy savings using a Home Energy Rating System (HERS) to measure current energy-efficiency. Please note that any associated costs and expenses of the energy rating report and related inspections can be financed alongside actual energy-efficient home improvements. In other words, a lender will actually seek to calculate and compute just how much you stand to save on your utility bills by making home improvements as part of the qualification and underwriting process.
Note that aspiring borrowers must also meet the specific financial requirements associated with their individual mortgage loan type, just as they would with loans that are not technically EEMs.
Alternatives To An EEM
If a homeowner does not qualify for an EEM, there are other options available to assist with funding home improvement projects.
- Cash-out refinance: You can fund your home improvement projects by taking advantage of the equity you’ve built in your home with a cash-out refinance.
- Home equity loan: Another way you can fund your home improvement projects is a home equity loan, which allows you to use the equity you’ve built in your home as collateral to borrow money.
- Personal loan: Although interest rates will likely be higher than those of home loans, a personal loan can assist you in funding any energy-efficient home improvement projects.
The Bottom Line
EEMs offer a handy way to reduce energy bills, lower annual expenses and minimize a household’s overall energy consumption. These financial products create more opportunities for homeowners to purchase and install energy-efficient home upgrades or give outdated home systems a much-needed overhaul.
By allowing prospective home buyers or current property owners to more easily finance green and eco-friendly solutions, EEMs offer a helpful way to lessen a household’s impact on the environment. Noting this, energy-efficient home improvements may still be a worthwhile investment to consider, even without financing them through an EEM.
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