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How does an energy-efficient mortgage work?
Making your home more energy efficient can help you save major money on your utility bills — but to save money, you first must spend money on those green improvements. This is where an energy-efficient mortgage (EEM) comes in. With an EEM, current homeowners and prospective home buyers can finance their energy-efficient improvements on both new and existing homes.
Learn more: Roll energy-efficient upgrades into your loan with the VA IRRRL program
In this article:
What is an energy-efficient mortgage?
Also referred to as a green mortgage, an energy-efficient mortgage is a type of home loan that allows you to buy or refinance an energy-efficient home or to finance green improvements to your home.
To qualify for an EEM, you must have a home energy rater or other professional complete an energy assessment on the house. This assessor lays out the estimated monthly energy savings to determine the value of the proposed green improvements. This information, known as the Energy Savings Value, is provided to the lender as part of the loan qualification process. Financing can only be approved after the assessment is submitted.
How do you use an energy-efficient mortgage?
There are several common ways for borrowers to use an EEM. The first occurs when they purchase an older home that has an inefficient HVAC system, needs insulation or weather stripping, or has other structural problems that waste energy. In this case, the home buyer might purchase the home with an EEM, so they borrow enough to cover both the house's asking price and the eco-friendly updates.
The second common way to use an EEM is to purchase an energy-efficient home, such as an ENERGY- STAR® certified home.
Finally, homeowners may also use an EEM to refinance their mortgage to fund energy-efficient improvements to their existing home.
What qualifies as an energy-efficient home improvement?
There are numerous types of renovations that could potentially lower your energy usage and costs, but not all energy-efficient improvements will qualify for EEM lending. Generally, you can expect the following types of home improvements to qualify for EEM financing:
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Energy-efficient appliances, such as washers and dryers
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Energy-efficient windows
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Weather stripping and caulking
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Insulation in attics, walls, and floors
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Green heating and cooling systems, such as solar panels, wind power, or geothermal power
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Weatherizing treatments
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Tankless water heaters
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Duct system installations or repairs
The home assessment will help you identify potential improvements with high Energy Savings Values that will qualify for EEM financing.
Read more: Other types of home renovation loans
How to get an EEM
Home buyers and homeowners can access an EEM through a conventional mortgage, FHA loan, or VA loan, although each program has its own requirements and rules.
Conventional energy-efficient mortgage
Borrowers who want a conventional loan have the choice between two EEM products: Fannie Mae’s Homestyle Energy Mortgage for purchasing or refinancing and Freddie Mac’s GreenCHOICE Mortgage® for use with any mortgage product or property type. With these conventional EEM loans, borrowers can access up to 15% of the home’s appraised value to use on qualifying green updates, while putting down as little as 3% as a down payment.
For example, let’s say you want to purchase a $250,000 home and upgrade its insulation, appliances, heating and cooling system, water heater, and windows. You intend to put down $7,500 (3% of $250,000) and qualify for a mortgage loan of $242,500. With a conventional EEM loan, you can borrow an additional $37,500 (15% of $25,000) to use for the energy-efficient improvements on the house.
FHA Energy Efficient Mortgage Program
Under this type of FHA program, the Federal Housing Administration (FHA) insures both the mortgage or refinance on a borrower’s principal residence and the cost of energy-efficient improvements made on the home. Borrowers only have to qualify for the loan amount for the mortgage or refinancing loan, not for the portion of the loan they will use for green upgrades. In other words, the FHA energy-efficient mortgage allows borrowers to access more money than they may otherwise qualify for because the additional funds are being used for energy-efficient upgrades.
To qualify for an FHA EEM, the green improvements you are financing with the loan must be evaluated as costing less than the energy savings you expect to receive. The maximum amount of money you can borrow for your energy improvements with the FHA EEM must be the lower amount of either:
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A home energy assessment’s evaluation of the cost of the energy-efficient improvements or
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The lesser of 5% of the following:
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The home’s adjusted value
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115% of the median area price of a single-family home
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150% of the national conforming mortgage limit
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As with typical FHA loans, FHA EEM borrowers must provide a minimum down payment of 3.5% of the purchase price — not including the portion of the loan that will finance the green improvements.
Veterans Affairs Energy Efficient Mortgage
Military members, veterans, and qualifying military spouses may qualify for a VA-backed EEM to pay for energy-efficient improvements when purchasing or refinancing a home. This EEM program allows home buyers to borrow no more than $6,000 on top of the VA loan amount they approved for. Additionally, VA energy-efficient mortgage borrowers are required to complete the green home improvements within six months of closing on the home.
Yahoo tip: Looking for a reputable lender that offers energy-efficient mortgages? Check out our Guild Mortgage review. Guild has conventional, FHA, and VA EEM options. Veterans United also provides VA EEMs.
Energy-efficient mortgage FAQs
How do energy-efficient mortgages work?
An energy-efficient mortgage helps boost your borrowing power because it allows you to take out one loan that covers both the value of the home plus the cost of the energy-efficient improvements. This way, you don’t have to take out two separate home loans and pay two sets of closing costs. EEM products can be used to buy a home you want to upgrade or refinance your current mortgage so you can renovate your current home.
Who offers EEMs?
Energy-efficient mortgages are available through Fannie Mae, Freddie Mac, the Federal Housing Administration, and the Department of Veterans Affairs. The borrower can get an EEM from participating mortgage lenders that offer these types of loans. Each EEM program has its own borrowing requirements, lending limits, and rules regarding what types of energy-efficient improvements qualify.
What kinds of energy-efficient improvements can you make with an EEM?
Not all green home improvement projects will qualify for EEM financing. Typically, borrowers can use an EEM to pay for improvements that insulate and weatherize the home, upgrade appliances to energy-efficient models, replace HVAC systems with green alternatives, and replace traditional water heaters with more efficient tankless models. Borrowers should check their EEM requirements and rules with their lender to make sure their planned improvements qualify.
This article was edited by Laura Grace Tarpley.
