Energy Efficient Mortgages aren't talked about much, which some might think they aren’t as good as a regular FHA loan. In my opinion, it’s because many loan officers and or lenders don’t know much about them. Yet there is no huge difference between the two. And one could easily associate an energy efficient mortgage with a FHA 203-k loan. But that would be a very bad assumption, because there isn’t much more to an energy efficient mortgage, known as an EEM loan, as opposed to the paperwork and understanding that goes into a 203-k loan.
Do you have high energy bills? Unless you are having a new home built that could be an energy efficient home, in many cases, the older home probably won’t be up to the current standards, which could cost you hundreds of dollars monthly. So how can you over come this problem? Very easily with an EEM loan.
Quick history about EEM’s - Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEM’s. (Energy Efficient Mortgages) EEM’s recognize that reducing utility expenses will allow a homeowner to pay a higher mortgage payment to cover the cost of the energy improvements that were financed into the mortgage. A main reason is because it offers homeowners who couldn’t initially afford the cost of these energy saving improvements out of pocket, giving them the chance to finance them. These loans can be both done when purchasing a new home or when refinancing.
FHA has adopted this into their financing options which allows a borrower to :
- save money monthly
- incorporate the improvement costs into the mortgage
- these improvements are installed after the loan closes
- this program allows you to use normal FHA guidelines with FHA mortgages
How does the Energy Efficient Mortgage program work?
The maximum amount of the portion of the EEM for energy improvements is the lesser of 5% of:
- the value of the property
- 115% of the median area price of a single family dwelling
- 150% of the conforming Freddie Mac limit.
- Properties that are eligible are One to Four unit existing and new construction properties.
- Borrowers are approved through the normal FHA mortgage guidelines for obtaining a mortgage.
- The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the lesser of 5 percent of the property’s value, depending on 3 different equations. Please refer to these changes above.
- To be eligible for this mortgage, the energy efficient-improvements must be cost effective, meaning that the total cost of improvements is less than the total present value of the energy saved.
- The cost of the energy improvements and the energy savings must be determined by a home energy rating report which is done by a home energy rating system (HERS) or energy consultant. The HERS report usually costs from $250 to $350 and can be paid by the seller, the buyer, or sometimes included into the mortgage.
- The energy improvements are installed after the loan closes. The money is placed into an escrow account and is released once an inspection verifies the improvements are completed and that the savings will be achieved.
- Because of this program, the final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements. Here is a list of the FHA max mortgage limits.
***I am not using a particular credit score and all closing costs are the same for either loan example.***
As you can see, it’s not a huge savings, but it does add up. Just in 1 year you saved $1,135.20. And the cost of the energy improvements that were added onto your mortgage now become a tax write-off.
**** My examples in the cost of improvements and your monthly bills, will vary depending on several different factors, such as age of air conditioner or heating, lighting fixtures, etc, etc. And also depending on what you pay per month. I only used these figures as examples.****
Reminder : There are special and certain tax credits both nationally and locally. For tax purposes, there is a $1,500 tax credit until the end of the year. Not sure if the government is going to extend this. There are also state credits and sometimes credits given by your utility companies. Just be careful though, because sometimes you have to use those they recommend when doing the energy inspection report.
Realtors : If your referring mortgage partner or in-house lender doesn't educate you on this kind of mortgage, either ask questions or possibly seek someone that understands this type of financing and who is very creative. An excellent loan officer is not always one that can close your loan or who calls back, but one who can do all of the above and provide excellent education and program scenarios. This will not only make happy buyers, but possibly provide more referrals. For more education and creative financing, please vist FHA loans & other mortgage options
Here is a link to a list of the past mortgagee letters for everything about Energy Efficient Mortgages. FHA Energy Efficient Mortgages – Mortgagee Letters
Energy Efficient Mortgage Series