FHA Energy Efficient Mortgage (EEM)
Energy-efficient homes are becoming increasingly popular, with 35 percent of homebuyers deeming environmentally friendly features very important in their home purchase. Going green can help you decrease your family's carbon footprint and allow for a more comfortable lifestyle — and the additional cost savings are a bonus.
An energy-efficient mortgage (EEM), often referred to as a green mortgage, is a loan offered to those looking to invest in an eco-friendly home. If you're interested in doing your part to help the environment while also saving on costs and creating a more comfortable lifestyle, our guide will break down everything you need to know about green mortgages and how you can apply for one today.
A green mortgage is an environmentally friendly home loan used to finance energy-efficient improvements to a home you are looking to buy or build. A mortgage lender will roll the cost of the upgrades into your primary mortgage, which can qualify you for a bigger loan without requiring a larger down payment.
Energy-improvement mortgages (EIMs) are also used to finance improvements to existing homes. Your lender can increase your loan amount to your existing mortgage to cover the energy upgrades' costs. Though this can increase your monthly mortgage payment, your overall costs will be lower because of the decrease in your energy bills.
The purpose behind these types of home loans is to make homeownership more affordable by using less energy, therefore decreasing utility costs.
The main difference between green and traditional mortgages comes down to factoring in energy-saving costs during the approval process. If you're planning to make upgrades to a home you're purchasing, a lender will look at how much these upgrades will cost and compare it to the overall value these upgrades will have over time.
As mentioned, lenders will offer you a larger loan amount to cover the energy-saving upgrades' costs. You typically won't be required to pay any added costs upfront, like an additional down payment, and your interest rate should stay the same. As with traditional mortgages, energy-efficient mortgages are insured through the Federal Housing Authority (FHA) and the Department of Veteran Affairs (VA).
There are three types of energy-efficient mortgage programs buyers can qualify for: FHA, conventional and VA, similar to traditional mortgage programs. Below is a breakdown of each program and its eligibility requirements.
An FHA Energy-Efficient Mortgage allows a buyer to qualify for energy-smart improvements on a home they are looking to buy or build. The buyer only needs to be approved for a loan amount required to buy the home, not the loan amount after the additional improvement costs are calculated.
For example, if the loan amount needed to purchase a home is $300,000 and the improvements will cost $10,000, the buyer will only need to be approved for the $300,000. FHA loans require a 3.5 percent down payment, which will stay the same even with the upgrades' added costs.
As with traditional loans, there is a limit to how much the FHA is willing to lend. You can borrow the lesser of 5 percent of:
Buyers typically use this loan to upgrade features such as HVAC systems, windows, insulation and solar technology. An energy assessment is needed before the loan can be approved to ensure the improvements are cost-effective.
Homebuyers looking to buy a home with traditional lenders like Fannie Mae can also qualify for an EEM. Fannie Mae will finance the energy-smart upgrades so long as the improvements do not exceed 15 percent of the home's value. The buyer's house will require an inspection and must receive a HERS (Home Energy Rating System) report. Through Fannie Mae, buyers are also eligible for water-efficient and weatherization upgrades with no home assessment needed.
A VA EEM is for qualified Veterans and active military looking to buy an existing home. Upgrades with this EEM should be aimed at increasing the home's energy efficiency over time by making small improvements to the home's heating, cooling or electrical systems.
With this type of EEM, most lenders will require you to keep the costs of improvements under $6,000. As with other EEM programs, your lender will require an audit of the home to ensure all energy-smart improvements will be cost-effective.
Energy-efficient mortgages are great options for first-time homebuyers who want energy-saving features in their home. Still, they wouldn't usually qualify for a loan amount to help them purchase a home with these features.
Though monthly mortgage payments will increase, these upgrades will allow more income to be put toward the mortgage. Since buyers can receive a higher loan amount with an EEM, it increases their chances of closing on a home because their offer will be more competitive.
EEMs also work for homeowners looking to upgrade their existing homes with energy-smart features to increase their home value and create a more comfortable space. For example, older homes may need new insulation or windows to keep pockets of cold air from seeping into the house.
These costs can add up, and not all homeowners can afford them out of pocket. Fortunately, refinancing a home using an EEM can help cover these costs. Homeowners will also be able to get a HERS report to learn about any other features that would make sense for them to improve.
The Home Energy Rating System (HERS) is a nationally recognized index used to measure a home's energy efficiency. When getting an EEM, a HERS report is an essential part of the process, as it tells lenders what modifications can make a home more energy-efficient and how much they would cost.
The HERS index rates homes on a scale of zero to 150. The lower your score, the more energy-efficient the home is. A standard new home typically has a score of 100, while lived-in homes have a score of around 130. Each point drop accounts for 1 percent of energy saved. For example, a home with a HERS index score of 65 is 35 percent more energy-efficient than a standard new home. See a state-by-state breakdown of HERS reports here.
Any buyer eligible for an FHA, VA or conventional loan will also qualify for an EEM. Before being approved, most EEMs require the home to pass an inspection from an energy specialist.
To pass, the home improvements must be cost-effective, meaning the overall cost savings must exceed the cost of the upgrades. For example, if a new HVAC system costs $5,000, the total savings need to exceed $5,000 in energy costs.
As mentioned, buyers who are already eligible for a traditional mortgage automatically qualify for an EEM. Buyers will need to obtain a HERS report from an energy rater during the inspection process. To get a HERS report, a home must be inspected by a certified RESNET rater.
The inspection can take two to four hours as the rater inspects different features of the house to determine the home's energy rating.
Once the rater finishes the evaluation, they will give the home an official HERS score and report. The report will include the cost estimates and recommendations for energy-saving upgrades.
Once the buyer obtains the HERS report, the lender will determine how much money they qualify for and what upgrades will be best. The borrower will then have 90 days to hire professionals to make the upgrades. After the upgrades have been made, the home must undergo an additional inspection to ensure the correct improvements were applied.
Going green has many benefits — with the most obvious being the financial savings and environmental benefits — but energy-efficient homes also increase the home's overall comfort. Below are some of the many benefits of going green with an FHA energy-efficient mortgage:
As mentioned, buyers financing upgrades with an EEM will be eligible for a higher loan amount to account for the necessary improvements, increasing a buyer's purchasing power. With EEMs, your lender can stretch your debt-to-income ratio because they will take the savings associated with the upgrades into account.
A higher loan amount on a traditional mortgage would result in a higher down payment and other fees, but even though the loan amount is higher with an EEM, these factors are not affected.
One of the most significant benefits of financing energy improvements through an FHA EEM is the long-term savings potential. According to the U.S Department of Energy, a typical U.S family spends $2,200 a year on utility bills but can save up to 25 percent over time by making home energy upgrades.
Similar to traditional mortgages, the interest paid on a green mortgage is tax-deductible, offering additional long-term savings. Since an EEM is rolled into a mortgage, homeowners will also save on costs they would have otherwise spent on a personal loan.
In addition to the above savings, energy-efficient homes can also be eligible for local, state and federal tax credits and rebates. Buyers are eligible for a 10 percent federal tax credit for the purchase of Energy Star products, so long as the home is your primary residence. This tax credit does not apply to new construction.
Rebates are also offered at the state level. Energy Star's rebate finder can help you find special offers and rebates in your area.
Aside from being cost-effective, an energy-efficient home can help the environment by reducing your carbon footprint. The U.S Department of Energy revealed that households release about 70 percent more CO2 than the average vehicle, and in 2019, the average household used energy that released about 17,000 pounds of CO2. The emissions released from our homes significantly impact our air and water quality, contributing to climate change.
A report from the American Council for an Energy-Efficient economy revealed that upgrades to existing homes could reduce carbon emissions by 18 percent.
By upgrading your home to be more energy-efficient, you'll help decrease the amount of carbon emissions released while helping you live a more comfortable, cost-effective life.
If you decide to sell your home down the line, having energy-efficient features can increase your overall property value, making your home a more desirable option for buyers. Freddie Mac found that properties with HERS ratings sold for about 2.7 percent more than those without. Since energy-smart features remain an essential factor in what homebuyers want, having these features will help increase your chances of selling your home at a competitive rate.
Energy-efficient homes are well ventilated, creating a more comfortable home environment. Weatherstripping, air caulking and proper insulation help keep moisture out of your home, reducing the chances of common hazards like mold and mildew. It can also help your home become less prone to gas leaks, fires and other home hazards, giving a homeowner peace of mind.
If you're looking to cut costs, do your part to decrease carbon emissions and live a more comfortable lifestyle, consider a green mortgage. To see if you qualify for an energy-efficient mortgage, check your eligibility for an FHA loan today.
