Vitality Environment friendly Mortgage (EEM): What It Is And How It Works

Use an energy-efficient mortgage for your green dream home

An energy efficient mortgage, or “green mortgage”, is a type of home loan that is used to buy or upgrade a green home.

You can use an EEM to buy an existing home that meets energy efficiency standards or to upgrade a home that you are buying or already own.

With low interest rates and many credit options, an EEM can be a great way to fund energy efficient home improvements at a relatively low cost. And you will likely save a bundle on utility bills in the long run.

Review Your Energy Efficient Mortgage Options (June 16, 2021)

In this article (continue to …)

What is the Energy Efficient Mortgage Program?

According to ENERGY STAR, a government-sponsored program, an energy-efficient mortgage allows you to "buy or refinance a home that is already energy efficient … or finance energy-efficient improvements to an existing home."

Why use an EEM? Because energy-efficient do-it-yourselfers can help you:

Save money on energy bills Reduce your personal contribution to pollution and climate change Make living more comfortable Sometimes you get a higher mortgage. Lenders know that a green home costs less than others. And they can count these savings as additional "income" to increase the value of the house. Freddie Mac stated: "… better rated houses are sold for 3-5% more than less rated houses"

You can also use some EEM loans to increase the home's resilience to natural disasters.

For example, suppose you live or buy in an area prone to cyclones, earthquakes, forest fires, or floods. You can use one of these loans to protect your property from their effects.

EEM benefits

According to the ENERGY STAR, 70,000 homeowners upgraded their homes to meet energy efficiency standards in 2020. That brings the number to 950,000 since the program began in 1992.

Many new and new homes are already ENERGY STAR compliant.

In fact, 2 million were certified when their construction was completed. And in 2019 alone, almost 100,000 were added.

You could potentially use an energy efficient loan to buy one of these existing homes. Or you can upgrade your existing home with energy-efficient refinancing. Both are allowed under the energy efficient mortgage program.

Review Your Energy Efficient Mortgage Options (June 16, 2021)

How do energy efficient mortgages work?

Every major home loan agency has an energy efficient mortgage program, including Fannie Mae, Freddie Mac, FHA, VA, and USDA.

Each EEM program has its own set of rules and processes, and the guidelines may vary depending on the lender as well.

However, the overall process for buying or refinancing a home with an EEM loan is generally the same:

The EEM process

You start with a visit from a professional who will do an energy assessment at home. This will give you a rating for the home – whether you already own it or plan to buy it – which defines how energy efficient it currently is.

Freddie Mac states that home buyers “will work with your lender to find a licensed energy assessor who can produce an energy report such as a home loan. B. a Home Energy Rating System (HERS) or a Home Energy Score (HES) report from the Department of Energy ”.

If your energy efficiency is already very good, you can buy or refinance your home with an EEM loan.

If the energy rating is below the required standards of your credit program, your home energy appraiser or other trained professional should:

Include the energy efficiency improvements they recommend. Tell them how the home should be valued when the improvements are complete. List the approximate cost of your energy upgrades. Tell you how much you are likely to save on running costs of your home each month and year

If you like what you hear, you can apply for the mortgage loan.

An EEM allows you to take out a loan in excess of the real value of the new home to help finance your energy efficiency.

You should expect a final inspection to ensure that all planned work has been completed to an acceptable standard. The lender may withhold some funds and not release them until confirmed.

Energy efficient mortgage programs

There are several EEM programs for home buyers and homeowners. These include:

Fannie Mae HomeStyle Energy MortgagesFreddie Mac GreenCHOICE MortgagesFHA Energy Efficient MortgagesVA Energy Efficient MortgagesUSDA Mortgages

Each program has its own requirements (see below). One common trait, however, is that all EEM programs require that your home improvement jobs be inexpensive. In other words, your energy savings have to justify your cost.

Conventional energy efficient mortgage

Traditional loans are not supported by the government. This includes “Compliant Loans”: mortgages that meet the standards set by Fannie Mae and Freddie Mac.

Each individual lender is free to set up their own conventional EEM mortgage program. But most will likely offer Fannie's HomeStyle Energy Mortgage or Freddie's GreenCHOICE Mortgage.

With these products you can spend up to 15% of the “finished” value of the property (what the appraiser considers the value of the house after the work is completed) for energy-efficient improvements.

For example, if the appraiser believes the home will be worth $ 350,000 when the energy efficiency improvements are complete, you can potentially spend up to $ 52,500 on those upgrades.

Meet EEM requirements for loans

Fannie and Freddie have almost identical requirements for borrowers:

Minimum deposit 3% credit score of 620 or higher A. Debt-Income Ratio (DTI) of 45% or less A stable and reliable income

As long as you are legally resident in the United States, you can apply for HomeStyle Energy or GreenCHOICE mortgage programs.

These loans are designed to help home buyers and owners improve the energy efficiency of an existing home and save on operating costs.

They are available when buying your own home (mortgage purchase) or when you want to upgrade your existing one (refinancing).

Check your conventional creditworthiness (06/16/2021)

FHA energy efficient mortgage

The Federal Housing Administration (FHA) also offers an energy-efficient mortgage program.

The FHA does not appear to have formal limits on spending on energy improvements – provided they are cost-effective.

But it says, "An FHA-approved lender can access the FHA's EEM calculator to determine the maximum dollar amount a borrower can fund for energy improvements." So get your lender to keep these numbers early in the process.

The minimum requirements for the FHA EEM loan are the same as other FHA mortgages:

Minimum deposit 3.5% credit score of 580 or higher (sometimes 500 with a 10% deposit) A debt-to-income ratio of 50% or less A stable and reliable income The home will be your primary residence

However, individual lenders can impose stricter approval requirements. So take a look at different lenders to find sympathetic ones.

Again, as long as you are legally resident in the United States, you can apply for one of these.

Check Your FHA Loan Eligibility (June 16, 2021)

VA energy efficient mortgage

The VA EEM program – supported by the U.S. Department of Veterans Affairs – available only to Veterans, Active Duty Members, or members of closely related groups. The last includes widows or widowers of someone who was eligible.

VA's energy efficient mortgage program has some unique rules when compared to other EEM loans.

If you're spending less than $ 3,000 on a modest project, you don't need a home energy assessment (HEA), according to Veterans United. All you have to do is submit a quote from a reputable contractor along with manufacturer specifications for the products you plan to use, and if you want to spend more – up to $ 6,000 – you need a home energy rating. You may be able to fund more than $ 6,000 worth of more energy efficient improvements with a VA loan (but not for tier two claims). But expect more challenges from lenders

VA EEM requirements

Qualified borrowers should consider the VA EEM loan before any other type. Because many believe these are the best mortgages of all. And you can see why:

Minimum deposit 0% No minimum credit rating (but most lenders require one, often in the range of 580-640) A debt to income ratio of 41% or less An income that is steady and reliable The home will be your primary residence

Perhaps the biggest benefit is that VA loans typically have the lowest mortgage rates available. And once you've paid your VA financing fee, you no longer have to pay for mortgage insurance.

Check Your VA Loan Eligibility (June 16, 2021)

USDA mortgages

You can apply for a USDA EEM loan if you have a low or middle income and want to buy a home in an area designated as "rural" by the US Department of Agriculture (USDA).

The USDA does not differentiate between energy efficient mortgages and its standard loans.

Instead, you apply for a USDA loan and its guidelines state, "Loan funds can be used to buy and install energy efficiency measures such as insulation, double glazing and solar panels."

USDA loans are attractive if you qualify:

Minimum deposit 0% No minimum credit rating (but most lenders require one, often 640 or higher) A debt-to-income ratio of 41% or less A stable and reliable income Home will be your primary residence

You need to pay for mortgage insurance with one of these insurances – both when you take out and annually. But modest premiums mean you may pay less than many other loans.

Talk to your lender about your energy efficiency needs to see how much you can spend.

Check Your USDA Loan Eligibility (June 16, 2021)

Which Lenders Offer Energy Efficient Mortgages?

Any lender offering the type of loan you want (compliant, FHA or VA) should be able to handle an EEM with ease. However, lenders are not required to offer them.

So when you put together your short list of potential mortgage lenders, ask each one about their policy on EEMs.

Even if the first lender you speak to offers EEMs, it's still worth poking around. Often times, borrowers save thousands of dollars by comparing quotes from multiple lenders. And that could turn the time you spend finding your best deal into the highest hourly rate you'll ever earn.

How much money can I save with an EEM?

How much money you can spend on energy upgrades – and how much you can save – varies from homeowner to homeowner.

But let's just look at one example.

This is a case study currently on the U.S. Department of Housing and Urban Development can be found. It affects Patricia and Mynette Theard when they first bought in California.

HUD says:

A house energy rating for the house recommended $ 2,300 for energy improvements, including ceiling, floor and oven duct insulation and a reset thermostat. Theards moved in and the improvements were installed. Monthly mortgage payments increased $ 17, but the Theards are saving $ 45 each month on lower utility bills. "

That's a total savings of $ 28 per month, which may seem modest. But it adds up to $ 330 a year and $ 10,000 over the course of a 30-year fixed-rate mortgage loan.

When calculating the cost versus the benefits of an EEM home loan, consider the long-term savings based on how long you plan to stay in the house.

Mortgage rates for EEMs

There is no reason to pay a higher mortgage rate on an energy efficient home loan.

You don't pose any higher risk to lenders with this type of loan. In fact, the savings you make on utility bills should make it easier for you to keep your monthly mortgage payments under control.

As a result, EEM loans can sometimes be easier to qualify than other loan types. And borrowers have access to today's low interest rates.

Confirm your new plan (June 16, 2021)

Related Articles