March 4, 2014
There is an option for FHA new purchase home loans and refinancing loans called the Energy Efficient Mortgage (EEM). According to the FHA loan rules found in HUD 4155.1, “Under the EEM Program, a borrower can finance 100% of the cost of eligible energy efficient improvements into the mortgage, subject to certain dollar limitations, without an appraisal of the energy efficient improvements. For the EEM Program, the
- mortgage amount includes the cost of the energy efficient improvements, in addition to the usual mortgage amount normally permitted
- FHA maximum loan limit for the area may be exceeded by the cost of the energy efficient improvements
- energy efficient improvements must be cost effective in order to be included into the mortgage, and
- amount of the cost effective energy package is added to the approved base loan amount before adding any upfront mortgage insurance premium (UFMIP).”
How does the FHA EEM work? The loan is initially drawn up as usual, without any EEM considerations. “FHA will endorse a mortgage for an existing property before the energy- efficient improvements are installed, provided that the lender establishes an escrow account and deposits funds into the account to pay for the energy- efficient improvements.”
Furthermore, “The EEM is initially underwritten as if the energy package did not exist, using standard FHA underwriting guidelines, qualifying income ratios, and maximum mortgage/minimum downpayment requirements, without regard to the energy package.
In addition to the cost of improvements, the borrower can get “stretch ratios” of 33% and 45% for an EEM on
• new construction, or
• homes that
− were built to the 2000 International Energy Conservation Code (IECC) formerly known as the Model Energy Code, or
− are being retrofitted to that standard.”
This is one situation where use of an escrow account may be required as a condition of getting the EEM worked out properly. Borrowers should discuss the escrow account issue with their lender to make sure they fully understand how it works and why it’s needed.
Some borrowers may wonder if they’ll be required to pay for a second appraisal due to the energy efficient upgrades, but FHA loan rules anticipate this question, stating:
“On an EEM, there is no need for a second appraisal that reflects the expense of the energy package and the improvements. The appraisal does not need to reflect the value of the energy package that will be added to the property for either new or existing construction.”
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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