How Does the FHA’s Energy Efficient Mortgage Work?

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Are you currently in the market to buy a home, and want to make sure there’s enough money in the pot to boost its energy efficiency once you take possession? If so, you may be able to get some financial assistance to help pay for these energy-efficient upgrades.

The Federal Housing Administration has a program that helps eligible borrowers cover the cost of making their homes more energy efficient. The FHA’s Energy Efficient Mortgage (EEM) extends funds that can be used to either purchase or refinance a property with the cost of energy-efficient upgrades included in the amount of the loan.

The great thing about the FHA’s EEM program is that it not only allows borrowers to boost the value of their homes, but it also helps to make the necessary changes needed to keep utility bills to a minimum.

Borrower Eligibility For the EEM Program

Borrowers who meet the requirements for a typical FHA mortgage may be eligible for the EEM program. For instance, a minimum credit score of 580 is required, and the debt-to-income ratio (DTI) must be less than 43% of the borrower’s gross income. This helps lessen the risk taken on by the lender in the case that the borrower defaults on the mortgage.

Property Eligibility For the EEM Program

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Detached homes, townhouses, and most condominiums are eligible under the EEM program, including existing and new construction.

A number of green upgrades qualify for financing under the FHA EEM program, including the following:

• Insulation

• Air sealing

• Duct repairs, sealing or replacement

• Programmable thermostats

• Low-flow toilet, faucets, and showerheads

• Hot water heater replacement

• Energy efficient doors and windows

• Solar panel installation

• New HVAC installation

A “Home Energy Rating Systems” report on the home’s energy efficiency will be required, which is conducted by a professional rater. Every aspect of the home’s efficiency will be inspected and rated. The present cost of the home will be factored into the rating and will be compared to the anticipated savings in energy once the green improvements have been made.

Once the present level of energy efficiency of the home has been established in its current state, the inspector will make suggestions as to what improvements should be made. The inspector will also list the costs of each upgrade as well as how much money can be saved as a result of the improvements.

How Does the EEM Program Work?

The FHA’s EEM program can be applied for at any FHA-approved lender, such as a bank, credit union, or mortgage firm. The FHA requires that a minimum 3.5% down payment must be made based on the purchase price of the home, as is standard with a typical FHA home loan. The total amount of the loan is based on the value of the property plus the projected expenses of the green upgrades.

To make it easier to see how the EEM process works in action, consider the following illustration: A buyer is buying a $400,000 home and has made a 5% down payment ($20,000) towards the purchase. That means a mortgage of $380,000 is required to finance the property. The buyer and lender-approved inspector determine that $7,000 in green improvements can be made to boost the energy efficiency of the home, and this extra $7,000 is added to the home loan, which now totals $387,000.

FHA EEM Loan Limits

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While the EEM program can provide you with the money needed to improve your home’s energy efficiency, there are limits to how much you can borrow. You can finance the cost of the energy-efficient improvements that are deemed to be cost effective into your mortgage. In this case, “cost-effective” means that the total present value of all energy that can be saved over the lifespan of the upgrade is more than the total cost of the green upgrade itself. 

FHA Energy Efficient Mortgage Programs are for $4,000 or 5% of the property value, whichever one is greater, up to a maximum of $8,000. No re-qualification for the loan program is required if an EEM is being applied for after the property home has already been bought.

The Bottom Line

The FHA’s EEM program provides borrowers with a great resource for extra funds to make improvements on their homes that will not only increase efficiency and decrease utility expenses, but also be better for the environment. Any means of reducing your carbon footprint on the earth while simultaneously saving money every month should be seriously considered, and the EEM program makes it easy.