Energy Efficient Mortgage

Purpose

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.

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. FHA insures loans. FHA does not provide loans.

Type of Mortgage

EEM is one of many FHA programs that insure mortgage loans--and thus encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms (such as first time homebuyers) and to residents of disadvantaged neighborhoods (where mortgages may be hard to get). Borrowers who obtain FHA's popular Section 203(b) Mortgage Insurance for one to four family homes are eligible for approximately 96.5 percent financing, and are able to fold closing costs and the upfront mortgage insurance premium into the mortgage. The borrower must also pay an annual premium.

EEM can also be used with the FHA Section 203(k) rehabilitation program and generally follows that program's financing guidelines. For energy efficient housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD's Title I Home Improvement Loan program.

How to Get a EEM

To apply for an FHA insured energy efficient mortgage, contact an FHA approved lender.

Eligible Customers

All persons who meet the income requirements for FHA's standard Section 203(b) insurance and can make the monthly mortgage payments are eligible to apply. The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or an energy consultant. The cost of an energy inspection report and related fees may be included in the mortgage. Cooperative units are not eligible.

EEM can also be used with FHA's Section 203(h) program for mortgages made to victims of presidentially declared disasters. The mortgage must comply with both Section 203(h) requirements, as well as those for EEM. However, the program is limited to one unit detached houses.

Eligible Activities

EEM can be used to make energy efficient improvements in one to four existing and new homes. The improvements can be included in a borrower's mortgage only if their total cost is less than the total dollar value of the energy that will be saved during their useful life. Other eligibility requirements may be found in the Homeowner's Guide.

Eligibility Requirements

The borrower is eligible for a maximum FHA insured loan, using standard underwriting procedures. The borrower must make a 3.5 percent downpayment. This 3.5 percent downpayment is based on the sales price or appraised value. Any upfront mortgage insurance premium can be financed as part of the mortgage.

Eligible properties are one to four unit existing and new construction. EEMs may be added to some other loan types, including streamline refinances.

The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the lesser of A or B as follows:

   A. The dollar amount of cost-effective energy improvements, plus cost of report and inspections, or

   B. The lesser of 5% of:

• The value of the property, or
• 115% of the median area price of a single family dwelling, or
• 150% of the conforming Freddie Mac limit.

To be eligible for inclusion in the 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 cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report that is prepared by an energy consultant using a Home Energy Rating System (HERS). The cost of the energy rating report and inspections may be financed as part of the cost effective energy package.

The energy improvements are installed after the loan closes. The lender will place the money in an escrow account. The money will be released to the borrower after an inspection verifies that the improvements are installed and the energy savings will be achieved.

The maximum mortgage limit for a single family unit depends on its location, and it is adjusted annually. To find FHA maximum mortgage limits for any county in the country. 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.

Technical Guidance

EEM is authorized under Section 513 of the Housing and Community Development Act of 1992. Program regulations are listed on the EEM mortgagee letter web page.

For More Information

Visit the FHA Resource Center to search the FAQs, ask a question or send an email.

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