Energy Efficient Mortgages

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Real Estate

Energy Efficient Mortgages

You need to get to know and love the Energy-Efficient Mortgage (EEM). Knowledge is power, and you need this weapon in your arsenal in order to find lenders who know how to use this important tool. In 1992 Congress mandated a pilot demonstration of energy-efficient mortgages (EEMs) in five states. In 1995 the pilot was expanded as a national program. FHA insured 16,000 EEMs in 1998, 30,044 EEMs in 1999 and 28,578 in 2000.

EEMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage. FHA EEMs provide mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy-efficient improvements into the mortgage. The borrower does not have to qualify for the additional money and does not make a downpayment on it. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD.

The Fannie Mae Energy Efficient Mortgage (EEM) is one of the most important products in their Housing and Environment Initiative, a comprehensive menu of mortgage options designed to promote the design, construction, and purchase of more efficient homes.

To qualify for an EEM, the property must have a Home Energy Rating Systems (HERS) report which evaluates the subject property's energy efficiency. Prepared by a trained Energy Rater, a HERS report covers such factors as window types, local climate, appliance efficiencies, insulation and utility rates to rate the home and calculate energy costs. The cost of the energy rating may be financed as part of the cost-effective energy package.

Program benefits

Energy savings reduce monthly operating costs

100 percent of energy improvements can be financed--up to 15 percent of the value of the home for existing homes and 5 percent of the home's value for new construction.

Increase borrower qualifying income

More comfortable home in all seasons and climates

EEM allows borrowers to qualify for a larger mortgage as a result of energy savings

Eligibility requirements

The borrower is eligible for maximum FHA financing, using standard underwriting procedures. The borrower must make a 3-percent cash investment in the property based on the sales price. Closing costs are not included in the 3- percent calculation but may be used to satisfy the requirement. Any upfront mortgage insurance premium can be financed as part of the mortgage.

Eligible properties are one- to four-unit existing and new construction.

The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the greater of 5 percent of the property’s value (not to exceed $8,000), or $4,000.

To be eligible for inclusion in this mortgage, the energy-efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.

The maximum mortgage amount for a single-family unit depends on its location and it is adjusted annually. The cost of the eligible energy-efficient improvements is added to the mortgage amount. The final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements.