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VA Energy Efficient Mortgage Program

VA Energy Efficient Mortgage Program

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru
  • VA Energy Efficient Mortgage Program Overview
  • 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 or VA IRRRL Refinance Program.  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.

    With a VA EEM loan borrowers are not required to re-apply when they add the cost of energy efficient upgrades to their base VA loan.  Additionally, borrowers are not required to make a larger down payment when using the program to buy a home.  For example, if a borrower is approved for a $300,000 VA loan to buy a $300,000 home, the borrower can add $6,000 in energy efficiency upgrades to the mortgage for a total loan amount of $306,000 without having to re-apply for the loan or obtain a special appraisal.  The borrower is 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.

    As demonstrated by the example, a VA Energy Efficient Mortgage allows borrowers to 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 the borrower significant time and money as compared to obtaining a separate loan or paying for the upgrades out of pocket.  Additionally, the larger mortgage amount means the borrower benefits from a higher mortgage interest tax deduction benefit, especially as compared to paying for the improvements with a credit card or personal loan, which provide no tax deduction benefit.  In short, the VA EEM program enables borrowers to make energy-efficient home improvements they otherwise may not be able to afford.

  • Important VA Energy Efficient Mortgage Considerations
  • Pros Cons
    • Finance a home purchase or refinance plus energy efficiency improvements with one loan
    • Borrower not required to re-apply to add improvements to mortgage amount
    • Low VA mortgage rate
    • No down payment required
    • Lower utility bills and increase property value
    • No monthly mortgage insurance fees
    • Limit on amount of energy efficiency improvements
    • Additional closing costs and longer mortgage closing process
    • Additional cost of upfront VA funding fee
    • VA loan limits
    • Program not offered by all lenders
  • How a VA Energy Efficient Mortgage Works
  • 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. 

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    Current VA Mortgage Rates as of March 26, 2019
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  • 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 performed by the energy auditor, lender or 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 mortgage 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.

  • What Energy Efficient Upgrades are Eligible for the VA EEM Program?
  • The program allows a wide range of energy efficient improvements including the following:

    • Solar energy systems
    • Caulking, weather stripping and vapor barriers
    • Upgrades to furnace and heating systems
    • New thermostats
    • Upgraded insulation
    • Upgrades to windows and doors
    • Water heater upgrades and insulation
    • Heat pumps
  • How Much Can I Spend on a VA Energy Efficient Mortgage Project?
  • 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 $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.

    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 him or herself, the borrower effectively reduces the project cost and 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 borrower labor, then only $2,000 is added to the mortgage amount.  Please note that borrowers cannot be paid or reimbursed for labor they 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.

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  • VA Energy Efficient Mortgage Requirements
  • 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.

    Borrower Eligibility

    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.

    Credit Score

    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.

  • Use our VA MORTGAGE QUALIFICATION CALCULATOR to determine what size VA loan you can afford
  • 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. 

  • VA EEM Loan-to-Value Ratio (LTV) and Down Payment Requirements
  • The maximum loan-to-value (LTV) ratio for a VA Energy Efficient Mortgage is 100% which means the borrower can finance 100% of the property purchase price plus the cost of the energy efficient upgrades.  This also means that the borrower is not required to make a down payment even after the cost of the energy efficiency upgrades is added to the base VA loan amount. 

  • VA Loan Limits
  • Lenders apply VA loan limits to the size of loan you can obtain through the program.  In the contiguous United States, the VA loan limit ranges from $484,350 for standard cost areas to $726,525 for high cost areas. In many cases lenders are willing to offer loans above than the loan limit but require borrowers to make a down payment equal to 25% of the amount by which the mortgage exceeds the limit. For example, if a borrower wants a $584,350 mortgage and the VA loan limit is $484,350, the lender requires the borrower to make a $25,000 down payment (25% x $100,000 (difference between mortgage amount and loan limit) = $25,000 down payment).

  • Program Costs and Fees
  • Mortgage Rate

    VA EEM mortgage rates are typically .250% - .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.

    Extra Costs

    In addition to standard mortgage closing costs, program applicants are required to pay an extra fee for the energy audit 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 an 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 the down payment amount, type of military service and if this is the borrower's 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 regular military personnel using the VA home loan program for the first time, the fee ranges from 2.15% of the loan amount if you make a down payment of 0% - 4.99% to 1.25% of the loan amount if you make a down payment of 10% or more.  The fee is higher for subsequent uses of the VA Program.

    Use the FREEandCLEAR Lender Directory to find top-rated VA lenders that offer home improvement loan programs.

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  • Mortgage Type and Program
  • Mortgage Program

    The program applies to fixed rate mortgages and selected adjustable rate mortgages (ARMs). Interest only mortgages are not permitted.

    Mortgage Type

    The VA Energy Efficient Mortgage Program applies to both home purchase mortgages as well as refinances.  Cash-out refinances are not permitted.

  • VA Energy Efficient Mortgage Property Eligibility
  • The program only applies to owner occupied properties. You can use the program to purchase single-family homes, condominiums or multi-family properties with up to four units as long as one of the units is lived in by the individual(s) who obtained the loan to buy the property.

  • Combining the VA EEM Program with Other VA Programs
  • 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


    Sources

    VA Energy Efficient Mortgage (EEM) Program Guidelines: https://www.benefits.va.gov/WARMS/docs/admin26/handbook/ChapterLendersHanbookChapter7.pdf

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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