The VA Energy Efficient Mortgages Program, also known as a VA EEM, enables eligible active and retired military personnel, including veterans and reservists, to include the cost of energy efficiency home improvements in their mortgage amount. A VA EEM loan is an "add-on" that is combined another VA program such as the VA Home Loan Program, VA IRRRL Refinance Program or other VA refinance. Borrowers do not need to receive special eligibility to combine a VA EEM loan with another program. If you are eligible for a VA Home Loan then you are eligible for the EEM Program. The EEM is added to your mortgage amount and the VA loan and EEM close at the same time.
You apply for the VA EEM program at the same time you apply for a VA home purchase loan or refinance. Additionally, in most cases you are not required to make a larger down payment when using the program to buy a home. For example, if you are approved for a $300,000 VA loan, you can add $6,000 in energy efficiency upgrades to your mortgage without having to re-apply for the loan or obtain a special appraisal. You are not required to re-apply for the new, higher mortgage amount because the energy efficiency improvements reduce your monthly utility costs which improves your ability to make your mortgage payment.
A key benefit of a VA Energy Efficient Mortgage is that you can finance the cost of energy-efficient home improvement projects with a low interest rate VA loan as opposed to paying for those costs out of pocket or with other types of higher-interest rate financing such as a second mortgage, home equity loan, PACE (Property Assessed Clean Energy) loan, personal loan such or credit card debt. Adding the cost of the improvements to the loan amount saves you significant time and money as compared to obtaining a separate loan or paying for the upgrades out of pocket. Additionally, the larger loan amount means you benefit from a higher mortgage tax deduction benefit, especially as compared to paying for the improvements with a credit card or personal loan, which provide no tax benefit. In short, the VA EEM program enables borrowers to make energy-efficient home improvements they otherwise may not be able to afford.
Select a VA Energy Efficient Mortgage Lender
Whether you are buying a home or refinancing your existing mortgage, the first step of the process is to work with a lender to get approved for a VA home loan. The lender reviews the property being financed as well as your military eligibility, credit score and financial profile to determine what size mortgage you qualify for, which is also known as the base VA loan amount. From the borrower’s standpoint, you interact with the lender, not the VA, when you apply for a VA Energy Efficient Mortgage.
You can apply for the VA Energy Efficient Mortgage Program with any VA-approved lender such as a bank, mortgage broker, mortgage bank or credit union. Due to the required extra work and involvement, not all lenders offer the VA EEM program so you may need to contact multiple lenders to find one that does. The table below compares rates and fees for leading VA lenders. We recommend that you contact several lenders to determine if they offer VA EEM loans and to review program requirements. Comparing multiple lenders and loan programs enables you to find the mortgage that best meets your needs.
Order Energy Audit
After you have selected a lender, the next step is to hire a qualified firm or independent contractor to perform an energy audit on the property. In some cases your local utility company can provide the energy audit. Some firms provide discounted or free home energy audits to veterans but make sure the firm or individual is certified and experienced in the this field. The energy audit identifies ways to improve a home’s energy efficiency and outlines the estimated cost of those improvements.
The audit also provides the estimated cost savings to the homeowner from lower monthly energy and utility expenses as a result of the efficiency improvements. In general, only upgrades that are determined to be cost-effective by the energy audit can be included in a VA Energy Efficient Mortgage. The borrower and lender use the audit to estimate the total cost of the energy efficiency improvements and add this figure to the base VA mortgage amount. Assuming there are no issues with the appraisal and title report, the mortgage eventually closes.
Mortgage Closes and Funds Are Released to Escrow or Earmarked Account
When the mortgage closes, the money that is used to buy the home or refinance an existing mortgage is disbursed to the designated parties and the funds allocated for the energy efficiency upgrades are placed in an escrow or dedicated earmarked account. As the projects are completed the borrower works with the lender to provide written documentation that verifies the work that was performed and confirms that all funds in the account have been disbursed properly. Work on the energy efficiency projects can begin before the mortgage closes (although that exposes the borrower to risk if the mortgage does not close) and are generally expected to be completed within six months of mortgage closing. In the event that the projects are not successfully completed within a reasonable timeframe any remaining funds in the account are applied to pay down the borrower’s mortgage balance.
Energy Efficient Upgrade Project Completed
When the energy efficient upgrades are completed, a final inspection is usually performed by the energy auditor, lender or a property inspector. The lender then informs the VA that the energy package has been implemented and that all funds in the escrow or earmarked account have been used. Any funds remaining in the escrow account are applied to your outstanding loan balance. At the conclusion of the VA Energy Efficient Mortgage process, your energy efficient upgrades should be completed and the escrow or earmarked account should be depleted and closed.
The program allows a wide range of energy efficient improvements including the following:
Borrowers can add up to $6,000 in energy efficiency improvements to their base VA loan amount without needing a new appraisal that shows an increase in property value resulting from the improvements. In conjunction with the lender, the borrower can add these costs to the mortgage amount without needing additional VA approval. For energy efficiency projects up to $3,000 the borrower can add the value of the projects to the mortgage amount by providing documentation such as project bids or contracts. For energy efficiency projects from $3,000 to $6,000, in addition to providing project documentation, the lender, working with the borrower, must also determine that the monthly savings from lower energy and utility costs is greater than the increase in the borrower’s mortgage payment from the higher mortgage amount.
If the borrower wants to include projects that exceed $6,000 in the mortgage amount, then the appraised property value must reflect the value of the improvements. Projects over $6,000 also require VA approval. In short, if you want to make $10,000 in energy efficiency improvements to a property and add $10,000 to your base VA loan amount, the post-improvement appraised value of the property must increase by at least $10,000. The lender must also verify that the borrower can afford the higher mortgage payment by providing a Certificate of Commitment to the VA. The lender is also required to document the value of the improvements according to VA guidelines.
Additionally, for a VA IRRRL refinance, if your new monthly mortgage payment including the EEM is 20% or more higher than your current payment, the lender is required to certify that you can afford the higher payment based on your monthly gross income and debt expenses.
If the borrower performs the improvement work then only the cost of the materials is added to the mortgage amount and not the cost of labor. By contributing sweat equity and doing the project on your own, you effectively reduce the project cost and your mortgage amount. For example if the total cost to install new insulation is $3,000, consisting of $2,000 in materials and $1,000 in your labor, then only $2,000 is added to your loan amount. Please note that you cannot be paid or reimbursed for labor you contribute to an energy efficient upgrade project according program guidelines.
Use our free mortgage quote form you to compare VA loan quotes from top-rated lenders. Our quote feature is easy-to-use, personalized and does not affect your credit. Comparing multiple mortgage proposals enables you to find the best loan terms.
Any borrower that meets the requirements for an VA home loan is eligible for the program. We review the key VA Energy Efficient Mortgage borrower qualification requirements below.
VA mortgage programs are available to eligible active and retired military personnel, including individuals in the reserves and national guard. To be eligible for a VA home loan, you must meet certain eligibility requirements and receive a certificate of eligibility from the VA. In general, eligibility is determined by date of military service, length of service, if the service occurred during wartime or peacetime and the type of discharge from the military. Typically, you are eligible for VA mortgage programs if you served on active duty for more than 90 consecutive days during wartime or more than 181 days during peacetime. National Guard members and Reservists are required to have served at least six years. Spouses of deceased or missing military personnel may also be eligible for VA mortgage programs. The VA Energy Efficient Mortgage Program does not impose any additional eligibility requirements.
The VA home loan program typically requires that borrowers have a minimum credit score of 620 to qualify. We recommend that you review your credit report six months to a year before you start the mortgage process to address potential issues.
Borrower Debt-to-Income Ratio and Residual Income
Lenders apply a maximum debt-to-income ratio and use a VA borrower residual income analysis to determine what size VA Energy Efficient Mortgage you can afford. To qualify for a VA loan borrowers typically must have a maximum debt-to-income ratio of 41%. The debt-to-income ratio represents the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense plus other monthly debt payments such as credit card, auto and student loans. The lower the debt-to-income ratio, the smaller the mortgage you qualify for.
The VA also requires that the borrower have a minimum level of residual (leftover) income after accounting for the monthly mortgage payment and other expenses. The minimum level of residual income required to qualify for a VA loan depends on the loan amount, the number of people in the borrower's household and the region of the country in which the property is located.
First-Time and Repeat Home Buyers
The program is available to both first-time and repeat home buyers as long as the borrower has entitlement remaining according to VA guidelines.
For a home purchase loan or refinance, the maximum loan-to-value (LTV) ratio for the base VA mortgage is 100% but you are also allowed to add up to $6,000 in energy efficiency improvements plus the VA funding fee to your loan amount, which means your LTV ratio can exceed 100%. This also means you can finance 100% of the property value plus the cost of the energy efficient upgrades. So as long as the amount of your energy efficiency upgrades is $6,000 or less, you are not required to make a down payment even after the cost of the upgrades is added to your base VA loan amount.
For example, if you want to buy a home valued at $100,000 and make $6,000 in energy upgrades and the VA funding fee is 2.3% of the loan amount, your maximum mortgage amount is $108,300. The LTV ratio in this example is 108.3% ($108,300 (loan amount) ÷ $100,000 (property value) = 108.3%).
The maximum LTV ratio for a VA IRRRL is calculated differently. In this case, the maximum loan amount is your current VA mortgage balance plus up to $6,000 in energy efficiency improvements plus permitted closing costs (including up to two discount points) plus the required VA funding fee.
Effective January 1, 2020, loan limits no longer apply to applicants with their full VA entitlement. This enables you to buy a home with no down payment and no maximum loan amount as long as you meet the other VA program qualification guidelines including credit score and debt-to-income ratio requirements.
VA EEM mortgage rates are typically 0.250% - 0.500% lower than the interest rates for other conventional energy efficient mortgage programs and comparable to the rates for the FHA EEM Program. The mortgage rate is lower because the program is backed by the government and military personnel tend to be more credit-worthy. Borrowers should shop lenders to find the low VA Energy Efficient mortgage rates and fees.
In addition to standard mortgage closing costs, program applicants are required to pay an extra fee for the energy audit, if applicable, as as well as for any engineering work associated with the energy efficiency improvements, although many of these costs can be included in the mortgage amount. Borrowers may also be required to pay extra lender, property inspection and escrow fees due to the additional work involved. Additionally, in case where the energy efficiency upgrades cost more than $6,000 borrowers may be required to pay extra for a supplemental appraisal report that determines the post-upgrade value of the property.
VA Funding Fee
With a VA Home Loan, the borrower is required to pay a one-time, upfront VA funding fee. The amount of the funding fee depends on your down payment amount (if any), loan program and if this is your first time using the VA program. With the VA EEM Program, the funding fee is calculated based on the total mortgage amount including the cost of the energy efficiency projects.
For a home purchase or construction loan, if you are using the VA program for the first time, the funding fee ranges from 1.40% to 2.30% of the loan amount, depending on your down payment, and 1.40% to 3.60% of the loan amount if this is not your first VA mortgage. For a cash out refinance, the funding fee is 2.30% of the mortgage amount for the first use of the program and 3.60% for subsequent uses.
Use the FREEandCLEAR Lender Directory to find top-rated VA lenders that offer home improvement loan programs.
The program applies to fixed rate mortgages and selected adjustable rate mortgages (ARMs). Interest only mortgages are not permitted.
The VA Energy Efficient Mortgage Program applies to both home purchase mortgages as well as refinances. For a VA IRRRL, a maximum of $6,000 in mortgage proceeds can be used for energy efficiency upgrades completed within 90 days of closing.
The program only applies to owner occupied properties. You can use the program to purchase or refinance a single-family home, condominium or multi-family property with up to four units as long as one of the units is lived in by the individual(s) who obtained the loan to finance the property.
A VA EEM loan is an "add-on" that is combined with another programs such as the standard VA Home Loan or VA Streamline Refinance (IRRRL) programs. The VA Streamline Refinance Program enables borrowers to refinance their existing mortgage with no appraisal report or credit check. Borrowers do not need to obtain additional eligibility to combine a VA Energy Efficient Mortgage with other VA programs.
Related FREEandCLEAR Resources
"Chapter 7.3. 3. Energy Efficient Mortgages (EEMs) ." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.About the author