Tuesday, February 26, 2013

Guest Post - Energy Efficient Mortgage (EEM)

What is an Energy Efficient Mortgage?

Energy efficient mortgages (EEMs, sometimes known as “green mortgages”) are loans that allow homeowners to finance energy-efficient upgrades for their current home or in a new home purchase. The cost of the upgrades is rolled into the mortgage so that multiple loans are not needed.

An EEM allows lenders to extend borrowers’ debt-to-income qualifying ratio, which means that they may be able to take out a larger home loan than would be allowed with a traditional mortgage. With an EEM, upfront costs may be higher than with a typical home loan. The reason for this is because improvements need to be made to a home to make it “energy efficient”. Despite the upfront cost, an EEM should save homeowners money in the long run through lower energy costs.

In order to qualify, the energy efficient home must undergo an energy audit by an approved inspector.

Conventional EEM:

A conventional EEM is the most commonly used green mortgage option. With a conventional EEM, the lender will be able to credit the borrower’s income by an amount equal to the amount of energy that will be saved with the renovations/upgrades. For instance, if a borrower makes $75,000 per year and stands to save $2,000 a year in energy costs by upgrading their home, their income will be $77,000 for underwriting purposes. This enables the borrower to purchase a more expensive home than they would otherwise be eligible for.

Federal Housing Administration (FHA) EEM:

FHA EEMs provide mortgage insurance to a borrower who is looking to purchase or refinance their home and incorporate the costs of energy efficient improvements into their mortgage. In order to qualify, the borrower must meet all the normal underwriting conditions for an FHA loan.

With an FHA EEM, the borrower can borrow the lesser of:

  • The total cost of the improvements plus report and inspections; or

  • The lesser 5% of the value of the property, 115% of the median area price for a single family house, or 150% of the Freddie Mac conforming loan limit.

In addition, the energy improvements must cost less than the total amount saved over the life of the improvements. Further, the improvements must be made after the loan closes. The funds for the improvement are put in an escrow account and released to the borrower when the loan closes.

Veterans Administration (VA) EEMs:

These green mortgages are available to veterans who qualify for financing through the VA. VA EEMs allow buyers to upgrade an existing home. Typically these loans are capped at $3-6,000 maximum.

Benefits of EEMs:

Energy efficient mortgages have been around since the early 1990’s but were used rather infrequently so many lenders were not aware of them at the time. Energy efficient improvements are starting to become more and more common as current home owners and future home buyers begin to realize how much money they could be saving on energy costs. Not only are the green improvements environmentally-friendly, but they also help homeowners save money. Since mortgage interest is tax-deductible, an energy-efficient mortgage can be a cost-effective way to finance any home energy improvements instead of using using a credit card, bank loan or cash, which offer no tax benefits. In addition to saving on energy costs, green improvements can increase the resale value of the home down the road.

If you’re looking for a way to make environmentally friendly home upgrades without huge up-front costs, an energy efficient mortgage could be great for you.

Mark Scheets is a writer at Total Mortgage Services. For the past fifteen years, Total Mortgage has combined the personal service and integrity of a local lender with low rates, convenience, speed, and know-how of a national lender.