From the Experts

What Is An Energy Efficient Mortgage?

Matt Young, MDC Financial Service Group

Matt Young, MDC Financial Service Group

Offered by the Federal Housing Administration (FHA), a federal government agency, its Energy Efficient Mortgage Program allows you to increase your loan amount to pay for energy improvements and qualify for a larger loan without an additional down payment.

If you’re considering an application for an FHA home loan or refinancing an existing FHA mortgage you may want to consider this program. FHA insures more than 40 percent of all existing and home purchase mortgages.

While your monthly mortgage payments increase slightly, you actually save money because your energy bills will be lower.
FHA insured loans allow buyers to get a mortgage with a down payment as low as 3.5 percent. The underwriting requirements to qualify for an FHA loan generally are less stringent than for conventional loans.

Which buyers and homes are eligible?

All buyers who qualify for an FHA home loan/refinancing qualify for the EEM. Availability is not limited by location, home price or utility company.
You may get an EEM on:

  • Older homes qualifying for upgrades
  • New or old homes not requiring upgrade
  • New construction

The cost of the improvements and the estimate of the energy savings are determined by a home energy rating system (HERS) from an energy consultant.

The cost of this report and related fees can be included in the mortgage. The home improvements can be included in the mortgage if the total cost is less than the total dollar value of the energy that will be saved during the useful life of the improvement (per the HERS or the consultant’s report).

What’s in a HERS (Home Energy Rating Systems) report?

Factors considered are insulation, appliance efficiencies, window types, local climate, and utility rates to rate the home and calculate energy costs. The HERS’ evaluation includes:

  • An overall Rating Index of the house as it is.
  • Recommended cost-effective energy upgrades.
  • Estimates of the cost, annual savings, and useful life of upgrades.
  • Improved Rating Index after the installation of recommended upgrades.
  • Estimated annual total energy cost for the existing home before and after upgrades.

A Rating Index is between 1 and 100. A lower index indicates greater efficiency. Cost-effective upgrades are those which will save more money through energy savings than they cost to install.

How much can you get?

The amount that is eligible to be financed is the lesser of the following:

  1. The lesser of:
  2. Dollar amount of the energy improvements, plus cost of report, inspections, etc. or
    • 5% of the value of the property;
    • 5% of 115% of the median area price of an single-family dwelling; or
    • 5% of 150% of the conforming Freddie Mac limit.

To find out what you qualify for and how best to include energy improvements to your mortgage, contact a qualifying lender. For general guidelines about the FHA program see HUD’s website: EEM.