Currently approximately 45% of all home loans are FHA loans. Being aware of some of the variations and features of these loans can ease the pain associated with replacing certain energy related items in the home, by allowing you to include the cost of these improvements in the loan without having to qualify for the additional loan amount. Sound too good to be true. Well it’s not.
What is an EEM – Energy Efficient Mortgage
An EEM is an FHA loan with a twist. The twist allows for a buyer or a home owner who is refinancing to finance 100% the cost of certain energy efficient improvements in their loan. The added amount does not increase equity requirements or down payment amounts, and allows for qualifying ratios to be stretched to 33/45. The EEM may be used in conjunction with a standard FHA loan, a 203B, 203k, or 203k Streamline. This program has been available in all fifty states since 1995.
How does an EEM – Energy Efficient Mortgage Work?
It works just like a FHA loan. You apply with a local lender for a FHA loan on a home, one you are buying or one you are refinancing. It may be used for all property types, existing as well as new construction. If the property being financed could benefit from energy related improvements the loan officer would order a HERS assessment (home energy rating system). A HERS assessment will determine if the total cost of the savings gained from the improvements are greater than the total cost of the improvements over the life expectancy of the improvements. If they are, you can add the improvement costs to the amount financed. The EEM limits are either (1) 5% or less of the property value, (2) 115% of the median price of a single family dwelling, or (3) 150% of the conforming Freddie Mac limit. Additionally the appraisal need not reflect the added cost of the improvements.
What are allowable EEM – Energy Efficient Mortgage improvements?
Some of the typical allowable improvements are insulation, heating and air system upgrades, window and door upgrades, and in some cases appliances may even be eligible. The HERS assessment will identify those items that would provide for a justifiable return on improvement cost over the useful life of the improvements. The HUD web site offers an additional check list for your convenience and a work sheet to get you started.
Step by step
- Make FHA loan application for purchase of a home or refinance of an existing home.
- Qualify based on FHA underwriting guidelines.
- Have an appraisal done, which will be ordered by the lender
- Have an HERS assessment done, which will determine if the energy savings when spread out over the life of the improvements will be greater than the cost of the improvements. Cost $450-$650
- Select your general contractor, who will make the improvements after closing.
- Close on your loan.
- The lender will escrow the cost of the improvements at the time of closing and will release them for payment to the General Contractor after verification that they have been installed and the energy savings are being achieved.
- Relax in the comfort of you energy efficient home.
If you have questions or need assistance with assembling the costs and managing the project give me a call. As a licensed General Contractor I can help you navigate the process, while saving you time and money.
Van Purser is a licensed real estate broker in Georgia. Since1981 he has successfully purchased and renovated over 400 homes. His expertise is in the area of foreclosures, rehabs and fixer uppers. Additionally, he has represented hundreds of clients over the years as a broker with Metro Brokers, RE/Max and now with his own firm. He and his wife, Jeanne, who is also a broker, have been married since 1977. For follow up on this article you may email Van at VanPurser@VanPurser.com