If you’re concerned about the environment, there’s life-changing steps you can take, and there’s simple ones. Energy Efficient Mortgages (EEMs) are a cost-effective and relatively easy way to curb your energy consumption.
An EEM is a specialized mortgage that allows veterans to make energy-efficient improvements on a new or refinanced home. This mortgage will cut utility bill costs and help buyers qualify for a larger mortgage. If you’re in the market for an energy efficient home, wanting to buy a home that needs improvements, or wanting to refinance your mortgage, consider doing so under an EEM. So how does an EEM work? You make an offer on a home and once you are under contract you can then request additional funds to make improvements to the home to make it more energy efficient (after closing). In most cases you can obtain up to $6,000 for energy efficient improvements assuming you qualify for the higher mortgage amount.
3 Cost Tiers for EEMs
There are three cost tiers of EEM’s:
- Improvements totaling $0 – $3,000: This is the easiest tier to get approved. You will generally need to provide a copy of a contractor bid or quote itemizing the costs and you will need to provide manufacturer information for each product.
- Improvements totaling $3,001 – $6,000: In addition to the information required in the first tier you will also have to obtain an energy audit showing a year’s worth of utility cost averages for the home. These documents will then be reviewed to determine if the proposed EEM improvements will make a significant enough impact on the utilities to be cost effective.
- Improvements of $6,001 and up: It’s difficult to obtain an EEM greater than $6,000 and requests for this tier have to be approved by the lender and the VA.
Getting a HERS Report
If you plan to pursue an EEM between $3,000 and $6,000 you’ll need to provide a Home Energy Rating System (HERS) report or an energy audit from the local utility company. The HERS report will document how efficiently a home is operating and where improvements can be made. The HERS scale ranges from 0-150, the lower the number the more efficient a home is functioning. The standard for new homes is a 100 HERS score.
The fee for an HERS report is typically around $300-800, but this cost can be covered by seller or buyer. You can also check with local utility companies for free or low-cost energy audits, as many private firms offer discounts for veterans.
3 Ways of Using an EEM
Energy Efficient Mortgages credit a home’s energy efficiency in the home loan. The credit from an EEM can be used in 3 ways:
- You can use an EEM on an already energy efficient home. The VA loan allows up to $6000 more on a loan if the home meets the energy efficient standards of the HERS. This can be the extra boost your mortgage needs.
- You can use an EEM to buy an older home that needs energy improvements. Improvements like thermal windows and insulation can be applied so the home meets HERS standards.
- You can refinance into an EEM if your current home needs energy improvement. If you have an outdated home that needs energy improvement, consider the benefits of refinancing under an EEM.
Benefits of the EEM
The environmentally-conscious consumer will rejoice knowing they’ve reduced their energy output and helped themselves.
With an EEM lenders can “stretch” the buyer’s debt-to-income ratio, which means a larger percentage of the buyer’s income can be applied to the monthly mortgage payment. A stretched DTI gives the buyer more borrowing power and can result in larger mortgage. But, it is important to note here that you still have to meet loan approval requirements for the higher amount (mortgage plus energy efficient improvement costs)
An EEM home will have reduced monthly utility costs. The lower utility costs means the value on your home will increase and you’ll be saving money on a monthly basis.
According to a Washington Post article, energy-efficient homeowners are less likely to default on a mortgage than regular mortgages. Researchers suggest lower utility costs helped homeowners put more money towards their mortgage payments.
Improvements the EEM Approves
An EEM can be used towards a variety of home improvements, but you won’t be using this extended mortgage for that new Energy Star certified 40” TV you’ve had your eye on. Here’s a list of acceptable improvements you can make:
- Thermal windows and doors
- Insulation for walls, ceilings, attics, floors and water heaters
- Clock thermostats
- Solar heating and cooling systems
- Furnace modifications
- Heat pumps
- Vapor barriers, storm windows/doors
There’s also a few items that will NOT be considered under an EEM:
- A/C unit
- Vinyl siding
- New roof or shingles
EEM homes will have increased comfort and protection against heat, cold, moisture, and pollution. In the long run, an EEM will pay terrific dividends and reduce your carbon footprint. If you’re thinking about getting an EEM you can talk to a loan specialist anytime by calling 800-884-5560.
Photo courtesy Dave Dugdale