As the single largest housing expense after a mortgage payment, utility costs can have a direct impact on how large of a mortgage a homebuyer can afford. Buyers can save money on the cost of utilities by making energy efficient improvements to the home they are purchasing. New homebuyers or current homeowners can use FHA’s Energy Efficient Mortgage (EEM) to finance the cost of these improvements. FHA offers the Energy Efficient Mortgage Program to allow homebuyers to finance the purchase of a home—or refinance a homeowner’s current mortgage—and include the cost of the energy-saving, cost-effective improvements through a single mortgage. FHA’s EEM program recognizes the monthly utility cost savings when homebuyers 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
Buyers 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 a 3.5% cash investment be made on the property, based on the sale price. The total amount of the mortgage is based on the value of the home plus the projected cost of energy efficient improvements.
Because the home will be more energy efficient, owners will save on utility costs and, therefore, be able to devote more income to the monthly mortgage payment. The final loan amount can exceed the maximum FHA mortgage limit by the amount of the energy efficient improvements. Buyers may finance into the 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 amount of the portion of the EEM for energy improvements is the lesser of 5% of:
- the value of the property, or
- 115% of the median area price of a single family dwelling, or
- 150% of the conforming Freddie Mac limit
A Home Energy Rating System provider will complete a measurement of the home’s energy efficiency and provide a report listing recommended cost effective energy improvements, an estimated cost of the energy improvements, and estimated energy savings to the buyers and their lender. Buyers 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. Buyers can begin making energy improvements after the loan’s closing, and the work must be completed within 90 days.
Eligibility:
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
- Townhouses
- Condominiums (certain restrictions apply)
Examples of improvements that are made under an EEM loan:
- Air sealing
- Duct sealing
- Replacing a heating/cooling system
- Replacing a water heater
- Lighting retro-fits
- Fixing or replacing a chimney
- Insulating an attic, crawl space, exterior walls, and/or pipes and air duct
- Replacing doors or windows
- Installing active and passive solar technologies
- Installing a programmable thermostat
