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Summary of Energy Efficient Mortgage (EEM) and Green Mortgage Programs

Summary of Energy Efficient Mortgage (EEM) and Green Mortgage Programs

    • Overview of Energy Efficient and Green Mortgage Programs
    • There are multiple mortgage programs that enable borrowers to finance the cost of energy and water efficient improvements to their home. Known as energy efficient mortgages (EEM) or green mortgages, these programs offer several benefits to borrowers. Most EEM programs allow borrowers to add the cost of energy efficient upgrades to their loan amount which eliminates the need to obtain a separate loan or pay for the improvements out of pocket. Including the cost of improvements to your mortgage typically saves you significant time and money as compared to arranging separate financing or using a credit card.

      Making energy efficient improvements to your home can also yield meaningful financial benefits. Homeowners benefit from lower utility costs, potential tax credits and utility rebates for installing energy-efficient appliances and an increase in property value. Plus the improvements typically lower emissions and reduce energy or water consumption which is positive for the environment. Examples of energy or water efficient home improvements include solar energy systems; wind energy systems; hot water heaters; new windows and doors; new heating, ventilation or air conditioning (HVAC) units; new roofs; new toilets, showers or faucets; new insulation or ducts; and, general weather-proofing or weatherization projects.

      As an added benefit, because the energy efficient improvements reduce your monthly utility costs, most EEM and green mortgage programs enable borrowers to qualify for a larger mortgage amount and buy a better home. The reasoning is the less money you spend on your utility bills, the more money you can spend on your mortgage payment which means you can afford a larger mortgage.

      Although each energy efficient mortgage or green loan program has unique attributes, they generally work the same way. In most cases borrowers obtain an energy report from a certified energy assessor or auditor that identifies opportunities for making energy or water efficient improvements to their home. The energy report also determines the cost-effectiveness of the improvements to ensure that the upgrades you implement will pay for themselves over time. For example, if you install new windows, the report estimates the monthly savings you realize by reducing your energy costs. In short, the programs are designed to make sure that you realize a return on the investment you make in the improvements.

      After you have identified the scope of energy efficient home improvements you want to make, you work with your lender to add the cost of these improvements to your mortgage amount. The lender also qualifies you as a borrower based on your credit score and financial profile. Assuming everything checks out ok with your mortgage application, property appraisal and title report, the mortgage closes and the loan funds allocated for your home improvements are placed in an escrow account.

      You typically have 90 to 180 days after your mortgage closes to use the funds in the escrow account to complete the energy efficient upgrades. Please note that most EEM programs prohibit borrowers from taking any cash proceeds from the loan and any leftover funds in the escrow account must be applied to your mortgage balance.

    • Key Questions Borrowers Should Ask About EEM and Green Mortgage Programs
    • Although all energy efficient and green mortgage programs offer borrowers similar benefits, their guidelines and requirements vary. There are several questions borrowers should consider when evaluating which EEM program is right for them.

      What are the program borrower qualifications?

      Each EEM program has a specific set of borrower qualification guidelines. Most of the programs focus on the borrower’s credit score, debt-to-income ratio and employment history. The PACE Loan Program, however, is less focused on the borrower and more on the property being financed and how much equity you have in the property. In some cases, EEM programs apply more flexible borrower qualification guidelines, such as using a higher debt-to-income ratio, which enables the borrower to qualify for a larger mortgage.

      Is there a mortgage limit?

      All of the energy efficient mortgage programs listed below apply limits to the size of mortgage or loan you can obtain. In some cases, the loan limit for an EEM program is higher than the limit for other types of mortgages, which provides the borrower greater financing capacity. Be sure that the mortgage amount you are seeking does not exceed the EEM program loan limit.

      Is there limit to energy efficient improvements I can make?

      Yes. EEM programs limit the size of energy efficient improvements that can be added to your mortgage or loan. Each program uses a different formula to calculate the amount of improvements that can be financed and you should understand if your project fits within the program limit.

      Does the program have extra fees?

      Because EEM and green mortgage programs require extra work and involvement on the part of the lender and third party service providers such as the appraiser, they typically charge higher fees as compared to regular mortgage programs. For example, most EEM programs require you to obtain an energy report or audit which can cost up to $800. Although the cost of the energy audit can be added to your loan amount and financed, borrowers should be aware of the extra fees associated with EEM programs at the beginning of the mortgage process.

      What interest rate will I pay?

      The interest rate on an energy efficient mortgage is typically comparable to the rate on a similar mortgage program and depends on several factors including your credit score, financial profile and the loan-to-value (LTV) ratio. Borrowers with higher credit scores and lower LTV ratios tend to pay lower mortgage rates. In general the FHA and VA EEM Program charge borrowers the lowest interest rate but the FHA EEM Program requires borrowers to pay higher ongoing fees, including the FHA mortgage insurance premium (MIP). Borrowers should compare proposals from multiple lenders to find the mortgage with the lowest rates and fees.

      What properties are eligible for the program?

      Most EEM programs apply to one-to-four unit residences. Some programs only apply to owner-occupied primary residences while other programs apply to non-owner occupied residences such as investment and rental properties. Additionally, new construction homes are not eligible for some programs while others such as the FHA EEM Program apply to both existing and new construction homes.

      What types of mortgages are eligible for the program?

      15 and 30 year fixed rate mortgages and certain adjustable rate mortgages (ARMs) are eligible for EEM programs. Most EEM programs do not allow interest only mortgages.

      Does the program apply to both buying a home and refinancing?

      Most EEM programs apply to both buying a home and financing improvements when you refinance an existing mortgage.

      The table below summarizes energy efficient and green mortgage programs available to borrowers. Click on the program title to review comprehensive information about each program including pros and cons, how the program works, borrower qualification requirements and other important program information.

    • Energy Efficient Mortgage (EEM) and Green Mortgage Programs
    • Fannie Mae HomeStyle Energy Mortgage Program
      • The HomeStyle Energy Mortgage Program enables borrowers to include the cost of energy-efficient upgrades in their loan amount when they buy a home or refinance their existing mortgage
      • Borrowers can use up to 15% of the post-upgrade, as completed property value for energy-efficient improvements
      • The program uses the post-upgrade appraised value of the home to determine the loan size which means the borrower can qualify for a larger mortgage amount
      • The objective of the HomeStyle Energy Program is to help borrowers improve the energy efficiency of their homes which can reduce their monthly utility costs and make owning a home more affordable
      FHA Energy Efficient Mortgage (EEM) Program
      • The FHA Energy Efficient Mortgage (EEM) Program enables borrowers to add the cost of energy-efficient improvements to their FHA loan when they buy a home or refinance their existing mortgage
      • As long as the improvements are determined to be cost-effective, borrowers do not need to re-apply or re-qualify for the larger post-improvement FHA loan amount and the borrower is not required to make a larger down payment
      • Borrowers using the FHA EEM Program also benefit from other positive aspects of FHA mortgages including only requiring a down payment of 3.5% to buy a home and more flexible borrower qualification requirements as compared to conventional loan programs
      VA Energy Efficient Mortgage (EEM) Program
      • The VA Energy Efficient Mortgages (EEM) Program enables eligible military personnel to include up to $6,000 in energy efficiency home improvements in their VA loan amount
      • The VA EEM Program applies to VA Home Loans for both purchase mortgages and refinancings and enables enables eligible borrowers to make energy-efficient home improvements they otherwise may not be able to afford
      • The VA EEM Program is available to eligible active and retired military personnel that qualify for a VA Home Loan
      Property Assessed Clean Energy (PACE) Loan Program
      • Property Assessed Clean Energy (PACE) loans enable you to finance 100% of the cost of energy efficient property improvements through a loan that is attached to the property as opposed to the borrower
      • When you obtain a PACE loan, a new assessment is added to your property and you pay the assessment when you pay your property taxes.  Because the loan is attached to property it may transfer to the new owner if you sell your home
      • PACE loans work differently than other EEM programs. Instead of going to a traditional lender such as a bank, to get a PACE loan you go to a program provider
      • PACE loans are currently only available to homeowners in a small number of states
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