Energy Efficient Mortgages
Energy Efficient Mortgages
An Energy Efficient Mortgage (EEM) takes into account a home’s energy efficiency in setting terms of the mortgage itself. It lets borrowers finance cost-effective, energy-saving measures as part of a single mortgage and stretch debt-to-income qualifying ratios on loans, this means you can qualify for a larger loan amount and a more energy-efficient home.
To get an EEM a borrower typically has to have a Home Energy Rating System (HERS) rater conduct a home energy rating before financing is approved. This rating verifies for the lender that the home is energy-efficient.
Many lenders require that the home energy auditor be Home Energy Rater System (HERS) certified because of the high quality standard that this rating system sets. EEMs are typically used to purchase a new home that is already energy efficient such as an ENERGY STAR qualified home.
Energy Improvement Mortgages
Energy Improvement Mortgages (EIMs) are used to purchase existing homes to which the borrower will make energy efficiency improvements without adding to the down payment.
EIMs allow the borrower to use anticipated utility bill savings to finance energy improvements. Both EEMs and EIMs typically require a home energy rating to provide the lender with the estimated utility bill savings and the value of the energy efficiency measures — known as the Energy Savings Value.
EEMs (and EIMs) are sponsored by federally insured mortgage programs (FHA and VA) and the conventional secondary mortgage market (Fannie Mae and Freddie Mac). Lenders can offer conventional EEMs, FHA EEMs, or VA EEMs.
Conventional Energy Efficient Mortgages (EEM & EIM)
Conventional EEMs can be offered by lenders who sell their loans to Fannie Mae and Freddie Mac. Conventional EEMs increase the purchasing power for buying an energy efficient home by allowing the lender to increase the borrower’s income by a dollar amount equal to the estimated energy savings. The Fannie Mae loan also adjusts the value of the home to reflect the value of the energy efficiency measures.
Federal Housing Authority (FHA) Energy Efficient Home Mortgages (EMI)
These mortgages are available to people buying a new home or who are refinancing. Lenders allow the debt-to-income ratios to increase by 2%. The money the home-buyer needs to make energy efficiency improvements is rolled into one mortgage, but even with the increased mortgage payments the homeowner ultimately saves money monthly because energy costs are lower. Interest rates are typically slightly higher than market rate.
FHA Section 203(k) Rehabilitation Mortgage Insurance
FHA Section 203(k) rehabilitation mortgage insurance provides a borrower with a single loan that covers both the purchase or refinancing and the cost of major home improvements, including those that save energy. The program allows borrowers to complete improvements after the loan closes. The funds are placed in an escrow account and released as improvements are made.
Step-By-Step Process for a FHA 203(k) EEM
- Find the house you want or decide to upgrade your home and tell your lender that you want an Energy Efficient Mortgage.
- Have a HERS rating done on the house.
- Send the rating to your lender and determine probable energy savings.
If your home qualifies for improvements:
- The lender puts money to pay for the improvements in an escrow “holdback” account.
- The loan closes and you move in.
- The home improvements are finished and Escrow clears.
If your home is already energy efficient:
- Your lender stretches your qualifying ratios if you need it to afford the home.
The loan closes and you move in.
Veterans’ Affairs (VA) EIM
Qualifying military personnel and reservists are eligible for the EEM if they are purchasing an existing home and want to make energy efficient improvements.
Energy Star Mortgage
These mortgages are a retail product offered by lenders participating in the Environmental Protection Agency’s ENERGY STAR New Homes Program. They are designed to encourage builders to construct homes to the Energy Star standard and encourage lenders to give EEM loans for Energy Star homes. The terms stipulate a minimum 2% stretch on debt-to-income ratio for the borrower and one of the following additional incentives:
- A lower interest rate
- A discount on closing costs and/or origination fees
- Up to a 4% extension of the debt-to-income ratio stretch
- Paying for the cost of the home energy rating.
PNC’s Energy Efficient Mortgages
PNC bank offers a variable rate home equity line of credit that can be converted to a fixed rate averaged against Fannie Mae rates. You must have an excellent credit history. For more information go to www.pnc.com/loanoffer.
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