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Energy Efficient Mortgages

In these times of increasing utility costs and increasing availability of renewable/green energy alternatives, you need to get to know and love the Energy Efficient Mortgage (EEM) and Energy Improvement Mortgage (EIM). In 1992 Congress mandated a pilot demonstration of EEMs in five states.  In 1995 the pilot was expanded as a national program.  FHA insured 16,000 EEMs in 1998 and the program has continued to grow in number loans as well as the number of programs and available loan originators.


EEMs and EIMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage.  Many of the most common loan programs including FHA, VA, Fannie Mae, and Freddie Mac offer forms of these loans with varying requirements and loan limits for improvements.  For example, FHA Energy Efficient Mortgages provide mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy-efficient improvements into the mortgage.  The borrower does not have to qualify for the additional money and does not make a down payment on it. In all cases, the mortgage loan is funded by a lending institution, such as a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD. The Fannie Mae EEM is one of the most important products in their Housing and Environment Initiative, a comprehensive menu of mortgage options designed to promote the design, construction, and purchase of more efficient homes.


To qualify for an EEM, the property must have a Home Energy Rating Systems (HERS) report which evaluates the subject property’s energy efficiency.  Prepared by a trained Energy Rater, a HERS report covers such factors as window types, local climate, appliance efficiencies, insulation and utility rates to rate the home and calculate energy costs.  The cost of the energy rating may be financed as part of the cost-effective energy package.


Program benefits

  • Energy savings reduce monthly operating costs
  • 100 percent of energy improvements can be financed – with limitations depending on the loan program and whether existing home or new construction.
  • Increase borrower qualifying income
  • More comfortable home in all seasons and climates
  • EEM allows borrowers to qualify for a larger mortgage as a result of energy savings


Eligibility requirements

  • The borrower eligibility is determined by standard underwriting procedures for the loan program used.
  • Eligible properties are one- to four-unit existing and new construction.
  • The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is dependent on the loan program and loan originator.
  • To be eligible for inclusion in this mortgage, the energy-efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
  • The maximum mortgage amount for a single-family unit depends on its location and it is adjusted annually.  The cost of the eligible energy-efficient improvements is added to the mortgage amount.  The final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements.


** For more detailed information and additional resources visit the Energy Efficient Mortgage page of the Housing and Urban Development (HUD) website or Energy Star.




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