Weve been discussing FHA refinance loan options in our recent blog posts, and home improvements are one important option for those with existing FHA mortgages or non-FHA loans alike. How can FHA refinance loans help a borrower make upgrades or improvements?
There are multiple programs available through participating FHA lenders including the FHA Energy Efficient Mortgage program (EEM), and FHA Rehab loans. Most of these options will require the borrower to work more closely with the lender to determine what may be funded using FHA refinance loans, but many projects are possible.
For FHA Energy Efficient Mortgages, borrowers can apply to add funds to the refinance loan for upgrades that result in lower utility bills, including approved solar heating systems, storm windows or doors, or other alterations. The borrower will be required to discuss specifically how the upgrades will result in lower utility bills and efficiency, and all upgrades must be lender-approved.
FHA EEM loans are discussed in the FHA Single Family Home Loan rule book HUD 4000.1. That discussion includes the following about what is required to justify the upgrades/improvements in the proposed energy package.
The energy package is the set of improvements agreed to by the Borrower based on recommendations and analysis performed by a qualified home energy rater. The improvements can include energy-saving equipment, and active and passive solar and wind technologies. The energy package can include materials, labor, inspections, and the home energy assessment by a qualified energy rater. If the Borrower desires, labor may include the cost of an EEM Facilitator (general contractor).
FHA EEM loans must pass a cost effective test. HUD 4000.1 explains, The financed portion of an energy package must be cost-effective. A cost-effective energy package is one where the cost of the improvements, including maintenance and repair, is less than the value of the energy saved over the estimated useful life of those improvements. The lender will be responsible for making sure the improvements meet this requirement.
FHA EEMs are an option for FHA refinance loans, but an EEM isnt for everyone; some borrowers wish to refinance for other reasons such as getting into a lower mortgage payment. But if your home is in need of upgrades to make it greener or more efficient, ask a participating lender about this important option.
We will discuss FHA rehab loan refinancing options in a future blog post.