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Energy Efficient Mortgages are great solutions for homebuyers looking to purchase or refinance and renovate a property with sustainable and energy saving upgrades. Over-use and over-consumption of energy can lead to an increase of greenhouse gases, air pollution, and more money out of your wallet. According to the Office of Energy Efficiency and Renewable Energy, residential homes account for more than 20% of the total energy consumption in the United States as of 2023.
An Energy Efficient Mortgage, also known as an EEM, allows homeowners and potential homebuyers to finance energy efficient home improvements through their home mortgage financing. Sometimes referred to as Green Mortgages or Green Loans, EEMs are offered through approved FHA and VA lenders, like Homestead Funding.
Even when choosing energy efficient upgrades, a borrower is not confined to a singular loan program. Existing homeowners can utilize one of FHA’s renovation programs, such as the 203(k), to make energy efficient improvements by including the additional funds necessary for upgrades in the same monthly payment without the need for a second loan.
For a home purchase or refinance, borrowers may choose to utilize FHA or VA programs. As both FHA and VA loans are insured by the Federal Government, protecting the lender if a borrower were to default or stop paying their loan. Borrowers benefit with the option of a lower down payment and competitive interest rates.
All borrowers must meet lender requirements to be approved, including minimum credit score requirements, documentation guidelines, and verification that the energy efficient improvements desired are cost-effective.
To obtain an EEM, you must first complete a home energy assessment. The assessment helps identify where energy efficient opportunities are and see how cost-effective they would be. After the assessment is completed by an energy rater, assessor, or auditor, a home energy report is created. This report includes any suggestions for improvements and estimates of energy savings. Based on the home energy report, your lender can determine the mortgage amount.
Borrowers may use an Energy Efficient Mortgage for new construction or an existing one- to four-unit single-family residence, including detached houses, townhouses, or condominiums, with certain restrictions.
Energy efficient improvements must be determined “cost effective” to be financed into your FHA mortgage. This means that the total cost of the improvements, including any maintenance costs, is less than the total of your expected energy savings.
The maximum cost of improvements that can be added to the mortgage is the lesser of 5% of:
With an FHA loan, the borrower has up to 3 months post-closing to install improvements. As with a standard FHA loan, the minimum down payment amount is 3.5% for an Energy Efficient Mortgage. Any upfront mortgage insurance premium can be financed as part of the loan.
Similarly to an FHA EEM, the VA has its own eligibility requirements. This version is only available for borrowers with VA eligibility, such as qualified veterans, active-duty service members, and surviving spouses.
Here’s the breakdown of how improvements can be financed:
In general, improvements must be completed within six months of the loan closing.
Acceptable energy efficient improvements include, but are not limited to:
Energy Efficient Mortgages are great solutions that save homeowners money and energy, all while having a positive impact on the environment!
When you have energy efficient appliances and systems in your home, you’re using less energy for your home’s primary functions. By reducing air leaks and heat exchange, your HVAC and heating systems won’t have to work as hard to move and filter air throughout your home. A smart thermostat also allows homeowners to preset their heating and cooling on a schedule, thus reducing the need for adjustments and energy over-consumption.
As well as lower utility bills, energy efficient home improvements often have a high return on investment. This means their benefits and reselling value are higher than the initial installation costs.
According to Energy Star, an energy-efficient electric heat pump water heater (HPWH) may cost about $700 more in upfront costs than a standard model but can save $3,500 over its lifetime. Additionally, the typical family spends at least $2,200 per year on energy bills, according to the U.S. Department of Energy. With energy efficient upgrades, homeowners can reduce that cost by up to 30%.
There may also be federal and state tax benefits for homeowners who invest in alternative energy and sustainability improvements. To learn more about these benefits, it’s best to contact your Loan Originator and consult with your tax advisor.
An analysis from Zillow found that homes with green features sold about seven days faster and for 1.4% more money than homes without. In a study by the National Association of Realtors, 63% of agents and brokers reported that promoting energy efficiency in property listings hold value for potential homebuyers. In the same study, 48% of homebuyers were concerned with sustainability and rated energy-efficient windows, doors, and insulation as “very important” in their home searches.
Older HVAC and heating systems generally don’t run as efficiently or as clean as more energy efficient or newer systems. Older heating systems may lead to a larger carbon footprint. Energy efficient systems are designed with improved ventilation to improve air quality and reduce air-borne allergens. In addition, with improved insulation and a smart, programmable thermostat, your home won’t be as affected by air leaks and poor humidity.
Offering a wide variety of loan programs is just one of the ways we work hard to make homeownership attainable for our borrowers. Are you interested in learning more about energy-efficient home financing? Ask us about qualifying for an Energy Efficient Mortgage today!
Homestead Funding offers exceptional customer service and a convenient mortgage process. Whatever your financing needs, our goal is to exceed your expectations.
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