As the single largest housing expense after a mortgage payment, your utility costs can have a direct impact on how large a mortgage you can afford. You can save money on the cost of utilities by purchasing new energy-efficient heating and cooling systems or by making home improvements, such as weatherizing and insulating older homes and these investments can end up saving you money through lower utility bills.
As a new home buyer or current homeowner, you may be able to use FHA’s Energy Efficient Mortgage (EEM) to finance the cost of these improvements. FHA which is part of HUD offers the Energy Efficient Mortgage Program to allow home buyers to finance the purchase of a home—or refinance your current mortgage—and include the cost of the energy-saving, cost-efficient improvements through a single mortgage. FHA’s EEM program recognizes the monthly utility cost savings when home buyers make energy-efficient improvements. Borrowers may use the EEM program to finance the cost of energy efficient improvements into their new mortgages, without the need to qualify for additional financing, because cost effective energy improvements result in lower utility bills making more funds available for their mortgage payments.
How the Loan Works
You can take out an EEM loan as a 15- or 30-year fixed-rate mortgage or as an Adjustable Rate Mortgage (ARM) from an FHA-approved lender. FHA requires that you make at least a 3.5 percent cash investment on the property, based on the sale price. The total amount of your mortgage is based on the value of your home plus the projected cost of energy-efficient improvements. Because your home will be more energy efficient, you will save on utility costs and, therefore, be able to devote more income to the monthly mortgage payment. Your final loan amount can exceed the maximum FHA mortgage limit by the amount of the energy-efficient improvements. To find FHA mortgage limits in your area, visit the HUD website at www.hud.gov. A Home Energy Rating System provider or energy consultant will complete a measurement of your home’s energy efficiency and provide a report listing recommended cost efficient energy improvements and an estimated cost of the energy improvements and estimated energy savings to you and your lender. You may finance the cost of the energy inspection report as part of the mortgage if the entire package, including these fees, is cost effective. The amount of the energy efficient improvements is placed in an escrow account and released after an inspection verifies that the improvements are installed and the energy savings will be achieved. You can begin making energy improvements after the loan’s closing. You are responsible for hiring contractors and getting bids for the work to be done on your home. The work must be completed within 90 days after closing.
Estimated mortgage payments are based upon principle and interest only, and do not include taxes and insurance. Value indicated here is for comparison only, and will vary from home to home. Many homes qualify for energy upgrades. This home qualified for $4,816 in upgrades. With the EEM, lenders recognize the savings the upgrades will bring. Borrowers may use these potential savings like extra cash, and add the cost of upgrades into the mortgage, paying them off easily as part of the monthly mortgage payment. Once the upgrades are installed the potential savings turn into real savings.
Almost anyone who has satisfactory credit, enough cash to close the loan, and sufficient steady income to make monthly mortgage payments can be approved for a FHA-insured EEM loan. There is no upper age limit and no certain income level required. The following types of properties are eligible under the EEM program, including new construction or existing one- to four-unit single-family residences:
• Detached houses
• Condominiums (certain restrictions apply)
The Cost and Types of Improvements
You may finance into your mortgage the cost of the energy-efficient improvements determined to be “cost effective,” which means that the total cost of the improvements, including any maintenance costs, is less than the total present value of the energy saved over the useful life of the energy improvement. The maximum cost of improvements that you can add to the mortgage is either 5 percent of the property’s value (not to exceed $8,000) or $4,000, whichever is greater based on the value of your property. For example, if your property’s value is $75,000, the maximum cost of improvements allowed is $4,000 because this is greater than 5 percent of the property value. If your property’s value is $100,000, the maximum amount of improvements allowed is $5,000 because this is 5 percent of the property’s value, greater than $4,000 but less than $8,000. Finally, if your property’s value is $160,000, the maximum cost of improvements allowed is $8,000, which is 5 percent of the property value and the maximum allowed overall. Examples of improvements that are made under an EEM loan:
• Replacing a furnace/cooling system
• Fixing or replacing a chimney
• Insulating an attic, crawl space, and/or pipes and air ducts
• Replacing doors or windows
• Installing active and passive solar technologies
If you can demonstrate you have the skills, time and ability to complete the work yourself in a satisfactory manner, your lender may authorize you to complete the labor portion of the installation yourself.
Applying for an EEM You may apply with any participating HUD-approved lender, such as a bank, credit union, or mortgage company. You can find a searchable list of HUD-approved lenders online at www.hud.gov. For lending in the deep south see this lender: Bo Smith @ Cornerstone Lending.
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