What is an energy saving mortgage?
An energy saving mortgage (EEM) is a loan to purchase or refinance a home that meets certain energy efficiency requirements, or to improve the home to make it more energy efficient. Like other types of mortgages, a home is a security for the loan.
EEM can be conventional, insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs (VA).
How does EEM work?
You can use EEM in conjunction with another mortgage, such as a conventional or renovation loan, and depending on the type of EEM, you can borrow up to 15 percent of the home’s appraised value for energy efficiency improvements.
When evaluating a borrower for EEM, a mortgage lender takes into account how much money the borrower has to save on utilities either by purchasing or refinancing an energy efficient home or making energy efficiency upgrades. These estimated savings are determined by an energy rating, and can help you qualify for a larger loan, because savings saves more in your budget to pay off the mortgage.
If your lender allows it, you may be able to do some renovation yourself to save money, but you can’t pay yourself – you can only use EEM money to pay for contractors or materials. You will have a certain amount of time to hire contractors and complete improvements after the loan closes, usually three to six months.
Once the improvements are completed, the lender will order an inspection of your home to verify that the improvements have been made and are actually increasing the home’s energy efficiency. If everything checks out, the lender will disburse the money to you.
Energy Saving Mortgage Options
Traditional EEMs, including the Fannie Mae HomeStyle Energy Loan, allow you to borrow up to 15 percent of a home’s appraised value for energy-efficient improvements. If you are buying or refinancing a home, this is a premium on the amount of the loan you took out for the purchase or refinancing.
A traditional EEM may also allow you to finance improvements to protect against natural disasters and storms, or pay off a property-appreciated clean energy loan (PACE), another type of energy-efficient home improvement loan.
A traditional EEM works just like a conventional loan and comes with similar requirements, such as a minimum down payment of 3 percent and a debt-to-income (DTI) ratio of no more than 45 percent. Its term can be 15, 30 years or another term, and a fixed or adjustable rate.
While EEM typically includes an energy rating, a Fannie Mae HomeStyle Energy loan doesn’t require one if you’re reimbursing up to $3,500 in simple “weathering” upgrades, such as installing insulation or a programmable thermostat; or repairs or upgrades for environmental or natural disasters.
FHA secures several types of mortgages, including the FHA, which can come with a term of 15 or 30 years and with a fixed or adjustable rate. With an FHA EEM, you do not need to qualify for the additional money that will go towards improving energy efficiency, but you do need to qualify for an FHA loan for purchase or refinancing. When buying a home, this includes a down payment of at least 3.5 percent.
With an EEM, the improvements you make must be “cost-effective,” meaning that the cost of the upgrades cannot exceed the energy savings they will produce over their lifespan. So, the amount you can borrow to improve energy efficiency, according to the FHA, is less than the following:
- cost of improvements based on energy assessment; or
- less than 5 percent of the home’s value; 115 percent of the median single-family home price; or 150 percent of the matching loan limit
If you qualify, the VA also supports energy saving mortgages. These are available to eligible military service members, veterans, and surviving spouses, and provide up to $6,000 to improve energy efficiency plus a VA loan for purchase or refinancing. You may have the option of getting more than $6000 with a VA EEM, but this is not common, as you will need approval from both the VA and the lender to do so.
If the cost of making improvements is $3,000 or less, you do not need to do an energy assessment, but you will need to provide a contractor estimate. As with other types of EEMs, the expected savings from energy efficiency improvements should outweigh the costs.
If you obtain a VA EEM, you must also complete the improvements within six months of closing the loan.
Energy saving mortgage requirements
If you are planning to buy or refinance a home, you need to qualify for this mortgage first. This means meeting credit score, DTI, and down payment requirements for the specific type of loan you take out:
While EEMs can have additional credit and documentation requirements, the most important requirement is to have an energy rating, in which an energy consultant will inspect the home and prepare a DOE Home Energy Score, and Home Energy Rating System (HERS) report or report. Another similar. This report contains information about potential improvements, their cost, and savings.
An energy assessment isn’t free—about $400 on average, according to HomeAdvisor—but you may be able to fund the cost of the report with your loan. You can find a local professional to perform the evaluation through the DOE or HERS websites.
As mentioned, you will usually have three to six months to complete the improvements once your loan is closed.
Acceptable energy efficiency upgrades
You can only use EEM to make certain improvements – you can’t go out and use the money to buy a new TV or paint the walls. These are some of the accepted upgrades:
- Energy saving devices
- Energy-saving doors and windows
- Replacing the oven or water heater
- Dam or strip the weather
- Solar Panels
Energy Saving Mortgage Lenders
You can get EEM through many of the same lenders that offer mortgages, including banks and credit unions. If you’re already working with a bank to get a purchase mortgage or refinance, ask if they offer EEMs.
Many states also facilitate green mortgage programs, and the state housing finance agency may be able to direct you to lenders that offer EEMs. You can find a link to your state authority in this bank directory.
Energy Saving Alternatives
If you want to make energy efficiency improvements in your home but need to borrow more than you can get with EEM – or don’t want to deal with an energy audit – here are some other options:
- cash refinancing If you have owned your home for a while, you should have some equity in the property that you can use for home improvement. With cash refinancing, you’ll refinance your existing mortgage and get cash based on your equity level, as long as you have (and can keep) 20 percent of your equity. Cash refinancing is generally a good idea if you can afford the closing costs, lower your mortgage rate and use the money to add value to your home or advance other financial goals.
- home equity loan A real estate equity loan works similar to a mortgage, allowing you to borrow money in a lump sum – with your home as collateral – and comes with a fixed interest rate and a term of up to 30 years. You can use the money for just about anything, including energy efficiency upgrades. Depending on the lender, you will need at least 15 percent or 20 percent equity to qualify.
- personal loan Personal loans are generally more expensive than equity loans and mortgages, but they don’t depend on you owning equity in your home and don’t offer your home as security. It’s also very flexible, so you can use it to make home improvements. Many lenders will not allow you to borrow large sums, which can make it difficult to finance major energy efficiency improvements, such as solar panels.