FHA Energy Efficient Mortgages – What are they

Saving money sounds like a great thing, right? In the news, we have been hearing more about hybrid automobiles, light bulbs that last longer, and how we can help sustain Earth as we know it. There is even more talk about green buildings, new or reconstructed, that will save you money because of rising energy prices. Basically help finding ways of making homes more energy efficient.

Information from HUD states that Congress started a pilot program in 1992 demonstrating the use of energy efficient mortgages, known as EEMs. The EEMs were first tried in 5 states and the program then expanded to all 50 states in 1995.

EEMs recognize that reduced utility expenses will allow a homeowner to pay a higher mortgage payment to cover the cost of the energy improvements that were financed into the mortgage. A main reason behind the EEMs program offers homeowner's who couldn't initially afford the cost of these energy saving improvements out of pocket, the chance to finance them. Thus cutting down on pollution and making the environment a better place to live.

 

Eligibility Requirements

• Properties that are eligible are One to Four unit existing and new construction properties.
• Borrowers are approved through the normal FHA guidelines for obtaining a mortgage.
• The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is greater of 5 percent of the property's value (not to exceed $8,000) or $4,000 – whichever is greater.
• To be eligible for this mortgage, the energy efficient-improvements must be cost effective, meaning that the total cost of improvements is less than the total present value of the energy saved.
• The cost of the energy improvements and the energy savings must be determined by a home energy rating report which is done by a home energy rating system (HERS) or energy consultant. The HERS report usually costs from $150 to $350 and can be paid by the seller, the buyer, or sometimes included into the mortgage.
• The energy improvements are installed after the loan closes. The money is placed into an escrow account and is released once an inspection verifies the improvements are completed and that the savings will be achieved.
• Because of this program, the final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements. Here is a list of the FHA max mortgage limits.

 

	Purchase of new home	Same home w/ energy improvements
Purchase Price / Refinance Value	$200,000	$205,340
Loan Amount  (97.75%) + w/MIP	$197,455	$202,726
Monthly Payment @ 7.00%   *	$1,313	$1,348
Monthly Energy Bills	$188	$104
The total monthly cost	$1,501	$1,452
Monthly Savings	-	$49

• Asterisk – Monthly payment does not include taxes or homeowners insurance.    As you can see, it's not a huge savings, but it does add up. Just in 1 year only you saved $588. 

 

Along with the FHA-backed loans for these EEMS, the VA (Veterans Administration) and FNMA / FHLMC also back these types of programs with their own guidelines.

To get a better idea of these types of loan programs, please consult with an Expert on all of your Mortgage Financing Options.

 

Department of Energy (DOE) and HUD established a joint response to energy efficient housing. 

  

Comments

[Leah Ross]

Jeff, this is a great post! There are more and more homeowners and buyers looking to take advantage of the benefits of being Green. You did a great job explaining the FHA mortgage side of this.

[christian stalberg]

Home Energy Rating Systems (HERS) is a scam. See http://www.energyscam.org

[Tom Burris]

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