What is an energy efficient mortgage?
An Energy Efficient Mortgage (EEM) is a loan to purchase or refinance a home that meets certain energy efficiency requirements, or to upgrade a home to make it more energy efficient. Like other types of mortgage loans, the home serves as collateral for the loan.
An EEM can be a conventional EEM, insured by the Federal Housing Administration (FHA) or guaranteed by the US Department of Veterans Affairs (VA).
How does an EEM work?
You can use an EEM with another mortgage, like a conventional loan or a home improvement loan, and depending on the type of EEM, you can borrow up to 15% of the appraised value of the home to make energy improvements.
When evaluating a borrower for an EEM, a mortgage lender considers how much money the borrower will save on utilities by buying or refinancing an energy-efficient home or making energy-efficient upgrades. These estimated savings are determined by an energy assessment and may help you qualify for a larger loan as the savings free up more in your budget for a mortgage payment.
If your lender allows it, you may be able to do some of the renovations yourself to save money, but you can’t afford to pay yourself – you can only use EEM funds to pay for the costs. contractors or materials. You will have some time to hire contractors and complete improvements after the loan closes, usually three to six months.
Once the upgrades are complete, your lender will order an inspection of your home to verify that the upgrades have been made and that they actually increase the home’s energy efficiency. If all goes well, the lender will release the funds to you.
Energy efficient mortgage options
Traditional EEMs, including the Fannie Mae HomeStyle Energy Loan, allow you to borrow up to 15% of the appraised value of the home to make energy efficient upgrades. If you buy or refinance a home, this is on top of the loan amount you got for the purchase or refi.
A conventional EEM can also allow you to finance improvements to protect against natural disasters and storms, or to pay off a PACE (Property Assessed Clean Energy) loan, another type of energy-efficient home improvement loan.
A conventional EEM works like a conventional loan and comes with similar requirements, such as a minimum down payment of 3% and a debt-to-income ratio (DTI) of no more than 45%. It can have a duration of 15 or 30 years or another duration, and a fixed or revisable rate.
While an EEM typically involves an energy assessment, the Fannie Mae HomeStyle Energy loan does not require one if you earn up to $ 3,500 in simple “weather” upgrades, such as installing insulation. or a programmable thermostat; or repairs or upgrades in the event of an environmental or natural disaster.
The FHA insures several types of mortgages, including the FHA EEM, which can have a term of 15 or 30 years and with a fixed or adjustable rate. With an FHA EEM, you do not need to qualify for the additional funds that will go towards energy efficiency improvements, but you must qualify for the FHA loan for purchase or refinance. When buying a home, this includes making a down payment of at least 3.5 percent.
With an FHA EEM, the upgrades you make have to be “cost effective,” meaning that the cost of upgrades cannot exceed the energy savings they would generate over their lifetime. So the amount you can borrow for energy efficiency improvements, according to the FHA, is the lesser of:
- The cost of the improvements based on the energy balance; Where
- The lesser of 5% of the value of the house; 115 percent of the median price of single-family homes in the area; or 150 percent of compliant loan limit
If you qualify, the VA also supports energy efficient mortgages. These are available to eligible members of military service, veterans, and surviving spouses, and provide up to $ 6,000 for energy efficiency upgrades in addition to the VA loan for a purchase or refinance. You might have the option of getting over $ 6,000 with a VA EEM, but this is not as common as you will need both VA and lender approval to do so.
If the cost to make the improvements is $ 3,000 or less, you will not need to do an energy assessment, but will need to provide estimates to the contractor. As with other types of EEMS, the savings expected from energy efficiency improvements should outweigh the costs.
If you get an EEM VA, you must also complete the upgrades within six months of the loan closing.
Energy efficient mortgage requirements
If you are planning to buy a home or refinance, you must first qualify for this mortgage. This means meeting the credit score, DTI, and down payment requirements for the specific type of loan you are getting:
Although EEMs may have additional credit and documentation requirements, the most important requirement is to obtain an energy assessment, in which an energy consultant examines the house and writes a home energy score report from the ministry. Energy Rating System (DOE), Home Energy Rating System (HERS), or other comparable report. This report contains information on potential improvements, their cost and savings.
The energy assessment isn’t free – around $ 400 on average, according to HomeAdvisor – but you may be able to fund the cost of the report with your loan. You can find a local professional to do the assessment through the DOE Where HERS websites.
As mentioned, you will usually have three to six months to complete the improvements after your loan ends.
Acceptable improvements in energy efficiency
You can only use an EEM for certain upgrades – you can’t go out and use the money to buy a new TV or paint walls. Here are some of the acceptable upgrades:
- Energy efficient devices
- Energy efficient windows and doors
- Replacement of furnace or water heater
- Caulking or weatherstripping
- Solar panels
Energy efficient mortgage lenders
You can get an EEM from many of the same lenders that offer mortgages, including banks and credit unions. If you are already working with a bank to secure a mortgage for a purchase or refinance, ask if they offer EES.
Many states also facilitate green mortgage programs, and your national housing finance agency may be able to direct you to lenders with EEMs. You can find a link to your state authority in this Bankrate guide.
Alternatives to an energy efficient mortgage
If you want to make energy efficient upgrades to your home but need to borrow more than you can get with an EEM – or if you don’t want to go through the process of an energy audit – here are a few other options:
- Refinancing of collection – If you have owned your home for a while, you should have some equity in the property that you can use to improve your home. With withdrawal refinancing, you will be refinancing your current mortgage and getting cash based on your level of equity, as long as you have (and can maintain) 20 percent equity. Refinancing with cash is usually a good idea if you can afford closing costs, lower your mortgage rate, and use the funds to add value to your home or move toward other financial goals.
- Home equity loan – A home equity loan works the same way as a mortgage, allowing you to borrow money in a lump sum – with your home as collateral – and has a fixed rate and a term up to 30 years. You can use the money for almost anything, including energy efficiency upgrades. Depending on the lender, you will need at least 15% or 20% equity to qualify.
- Personal loan – Personal loans are more expensive than home equity loans and mortgages in general, but they do not depend on the equity in your home and do not put your home as collateral. They are also very flexible, so you can use them to make improvements to your home. However, many lenders do not allow you to borrow large amounts, which can make it difficult to finance major energy efficiency improvements, such as solar panels.