Guide To Lenders
July 24, 2014

Home Improvement with Energy Efficient Mortgages

Gina Pogol

Energy-efficient homes are easier on the environment and easier on your wallet. And there are programs to make them easier to finance as well. Learn how to finance your home improvement projects painlessly with Energy Improvement Mortgages (EIMs) and Energy Efficient Mortgages (EEMs).

Home Improvement Tips: Refinancing with Energy Efficient Mortgages

There are different mortgages for different home energy improvement needs. Energy Efficient Mortgages (EEMs) allow you to purchase an energy-efficient home with special concessions. Energy Improvement Mortgages (EIMs) offer similar benefits to those buying a home and adding energy-efficient home improvements or refinancing a home and adding energy-efficient upgrades. And Energy Star loans confer special benefits on those who purchase new Energy Star homes.

Energy Efficient Mortgages (EEMs)

Energy Efficient Mortgages are loans for purchasing energy-efficient houses. You may be offered better mortgage terms, and you may qualify for a larger loan amount; your expected savings on utility bills can be used to augment your income or adjust your debt-to-income ratios.

Energy Improvement Mortgages (EIMs)

An EIM provides funds beyond what is needed to purchase or refinance you home. You don't usually have to qualify for the additional funds, because lenders expect that the money you save will offset the cost of making the home improvements. You can finance 100% of eligible projects. Your home gets rated by professional energy inspectors, and the estimated savings that would be created by your home improvements can be used to adjust your income, qualifying you for a bigger mortgage.

What Is an Energy Star Mortgage?

Energy Star mortgage loans can supply several benefits, although most lenders don't offer them all--it pays to shop around. Benefits include free energy inspections, higher debt-to-income ratios, discounts on interest rates, and lower closing costs. Only those who buy Energy Star houses are eligible for Energy Star mortgages; to be rated, homes must be at least 30% more energy-efficient than Model Energy Code requirements.

Where Do You Find Energy Efficient Mortgages?

Energy efficiency mortgages are offered by several providers and agencies:

  • Federal Housing Administration (FHA). The FHA's energy efficiency mortgage program works by adding the acquisition cost of renovations to your mortgage amount. No appraisal of the value of the home improvements is required. Energy renovation allowances are limited to $4,000 or 5% of the appraised value of the property without the energy upgrades, whichever is greater (up to $8,000). The additional amounts don't increase your down payment or home equity requirements, and the total loan amount can exceed FHA mortgage limits. If you have the know-how, you can save even more money and do the work yourself. Standard FHA underwriting is used.
  • Veterans Affairs (VA). The VA program lets you add up to $6,000 in home improvements to your mortgage without requiring an improvement appraisal. You can include more renovations if the cost of the improvements can be 100% offset by a corresponding increase in your home's value. The total financed cannot exceed VA loan limits.Standard underwriting applies and, according to the VA lenders' handbook, "the lender must evaluate the veteran's ability to pay the increased loan payments caused by addition of energy efficiency improvements."
  • Conventional lenders. The Fannie Mae and Freddie Mac EEMs increase your buying power when you purchase an energy-efficient home because underwriters adjust your income upward to include the expected energy savings. Fannie Mae's HomeStyle EEM mortgage also adjusts the value of the home to account for the addition of energy-efficiency improvements. Freddie Mac adds underwriting concessions to its regular mortgage offerings when you finance an energy-efficient home. The program increases allowable qualifying ratios by 2%. For home purchase mortgages, the cost of the energy-efficient home improvements can be used to decrease your loan-to-value ratio.
  • Retail mortgage lenders. You can find Fannie, Freddie, FHA, VA, and Energy Star mortgages by getting mortgage quotes and checking with several mortgage lenders. You can get an energy efficient new home loan or refinance mortgage by comparing companies and asking them what programs they offer.

Show Me Some Green!

Going green can save you some green by improving your home's value and shrinking your utility bills. Whether you refinance and add improvements, buy a new efficient home, or upgrade the home when you purchase it, there are loans to make it happen.

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