Required by law to save you money. With the current environmental and economic climate, the FHA’s Energy Efficient Mortgage (EEM) program is gaining momentum. The benefit of the program is that it encourages homeowners to make energy efficient improvements to their homes that reduce our dependence on foreign energy sources, reduce harmful emissions, and reduce the monthly debt load of home buyers freeing up additional funds to flow into our economy. Because of the multitude of benefits, our government is willing to literally pay you to make many of these upgrades.
Two varieties of the FHA EEM loan exist:
- EEM Home Purchase Loan
- EEM Streamline Refinance Loan (for those who already have a home with an FHA mortgage)
The basic concept behind the EEM is that the energy efficient upgrades made to a home will save the homeowner more than the increased monthly payment due to a slightly higher mortgage amount (as the cost of improvements are added to your principal balance). Example: You purchase a $150,000 home with 3.5% down and plan to do $5000 in energy efficient upgrades which were determined by a HERS rating to save you $75 per month in energy costs.
- Loan balance without improvements: $148,007 (includes MIP of 2.25%)
- Monthly payment (P&I) 5% interest rate on a 30 year loan: $794.54
Here is the example with the improvements:
- Loan balance with improvements: $153,007 (includes MIP of 2.25%)
- Monthly payment (P&I) 5% interest rate on a 30 year loan: $821.37
- Now subtract the $75 utilities savings: $746.37
- That’s a net savings of $48.17 per month
Note that by law, an energy efficient mortgage can be allowed only when it is proven by a HERS report that the borrower will save money each month.
What are the Benefits of an Energy Efficient Mortgage?
- Overall net savings on your housing payments including utilities
- An opportunity to upgrade old appliances, financing them into your mortgage
- With current tax credits and rebates, the ability to receive hundreds or even thousands of dollars after your energy upgrade allowing you to do additional repairs (whether they be energy efficient or just desired upgrades)
- Reduced emissions
- Reduced dependence on foreign energy sources
EEM Requirements and Eligibility
An EEM works just as any other FHA mortgage, however, two additional steps are required:
- A home energy rating report from a home energy rating system (HERS) is completed. The report details the improvements to be made and estimates the monthly savings from those improvements.
- The amount shown on the report as needed for those improvements is rolled into the FHA loan. Amazingly, you do not need to qualify for the additional payments nor do you need to make a down payment on that portion of the loan. 100% of the improvements are financed. Because your utility payment is required to go down by at least the amount of the increased mortgage payment, the underwriter does not require that you qualify for this portion of the loan.
Keep in mind that the energy efficient improvements are made after closing through an escrow account held by the lender, much like a renovation or 203k loan. This guarantees that the funds will be available to make the repairs.
