What is an energy-efficient mortgage?

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What is an energy-efficient mortgage?

An energy-efficient mortgage (EEM) is a loan for purchasing or refinancing a home that meets certain energy-efficiency requirements, or improving a home to make it more energy-efficient. Like other types of mortgages, the home serves as collateral for the loan.

An EEM can be a conventional EEM, insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs (VA).

How does an EEM work?

You can use an EEM alongside another mortgage, such a conventional loan or renovation loan, and depending on the type of EEM, can borrow up to 15 percent of the home’s appraised value to make energy-efficiency improvements.

When assessing a borrower for an EEM, a mortgage lender considers how much money the borrower stands to save on utilities by either buying or refinancing an energy-efficient home or making energy-efficiency upgrades. These estimated savings are determined through an energy assessment, and can help you qualify for a larger loan, since the savings free up more in your budget for a mortgage payment.

If your lender allows it, you might be able to do some of the renovation work yourself to save money, but you can’t pay yourself — you can only use the EEM funds to pay contractors or for materials. You’ll have a certain amount of time to hire contractors and complete the improvements after the loan closes, usually three to six months.

Once the improvements are finished, your lender will order an inspection of your home to verify that the improvements have been made and are truly increasing the home’s energy efficiency. If everything checks out, the lender will disburse the funds to you.

Energy-efficient mortgage options

Conventional EEM 

Conventional EEMs, including the Fannie Mae HomeStyle Energy loan, allow you to borrow as much as 15 percent of the home’s appraised value to make energy-efficient improvements. If you’re buying or refinancing a home, this is on top of whatever loan amount you obtained for the purchase or refi.

A conventional EEM might also allow you to finance improvements to safeguard against natural disasters and storms, or pay off a Property Assessed Clean Energy (PACE) loan, another kind of energy-efficient home improvement loan.

A conventional EEM works just like a conventional loan and comes with similar requirements, such as a minimum down payment of 3 percent and a debt-to-income (DTI) ratio of no more than 45 percent. It can have a 15- or 30-year term or other duration, and a fixed or adjustable rate.

While an EEM typically involves an energy assessment, the Fannie Mae HomeStyle Energy loan doesn’t require one if you’re making up to $3,500 in simple “weatherization” upgrades, such as installing insulation or a programmable thermostat; or environmental or natural disaster repairs or upgrades.

FHA EEM

The FHA insures several types of mortgages, including the FHA EEM, which can come in a 15- or 30-year term and with a fixed or adjustable rate. With an FHA EEM, you don’t need to qualify for the additional funds that’ll go toward energy-efficiency improvements, but you do need to qualify for the FHA loan for the purchase or refinance. When buying a home, this includes making a down payment of at least 3.5 percent.

With an FHA EEM, the improvements you make have to be “cost-effective,” meaning that the cost of the upgrades can’t exceed the energy savings they’d yield over their lifespan. So, the amount you can borrow for energy-efficiency improvements, according to the FHA, is the lesser of:

  • The cost of the improvements based on the energy assessment; or
  • The lesser of 5 percent of the home’s value; 115 percent of the area median single-family home price; or 150 percent of the conforming loan limit

VA EEM

If you qualify, the VA also backs energy-efficient mortgages. These are available to eligible military service members, veterans and surviving spouses, and provide up to $6,000 for energy-efficiency improvements on top of the VA loan for a purchase or refinance. You might have the option to obtain more than $6,000 with a VA EEM, but this isn’t as common, as you’ll need approval from both the VA and the lender to do it.

If the cost to make the improvements is $3,000 or less, you won’t need to do an energy assessment, but will need to provide contractor estimates. As with other types of EEMs, the projected savings from the energy-efficiency improvements need to outweigh the costs.

If you get a VA EEM, you also have to complete the improvements within six months of closing the loan.

Energy-efficient mortgage requirements

If you’re planning to buy a home or refinance, you need to qualify for that mortgage first. This means meeting the credit score, DTI and down payment requirements for the specific type of loan you’re getting:

While EEMs can have additional credit and documentation requirements, the most important requirement is to obtain an energy assessment, in which an energy consultant examines the home and draws up a Department of Energy (DOE) Home Energy Score Report, a Home Energy Rating System (HERS) report or other comparable report. This report contains information about potential improvements, their cost and how much they’ll save.

The energy assessment isn’t free — about $400, on average, according to HomeAdvisor — but you might be able to finance the cost of the report with your loan. You can find a local professional to do the assessment through the DOE or HERS websites.

As mentioned, you’ll typically have three to six months to complete the improvements once your loan closes.

Acceptable energy-efficiency upgrades

You can only use an EEM for certain improvements — you can’t go out and use the money to buy a new TV or paint walls. These are some of the acceptable upgrades:

  • Energy-efficient appliances
  • Energy-efficient doors and windows
  • Furnace or water heater replacement
  • Caulking or weather-stripping
  • Insulation
  • Solar panels

Energy-efficient mortgage lenders

You can get an EEM through many of the same lenders that offer mortgages, including banks and credit unions. If you’re already working with a bank to get a mortgage for a purchase or refinance, ask about whether it offers EEMs.

Many states also facilitate programs for green mortgages, and your state housing finance agency may be able to direct you to lenders that offer EEMs. You can find a link to your state authority in this Bankrate guide.

Alternatives to an energy-efficient mortgage

If you want to make energy-efficiency improvements to your home but need to borrow more than you can get with an EEM — or don’t want to deal with the process of an energy audit — here are some other options:

  • Cash-out refinance – If you’ve owned your home for a while, you should have some equity in the property that you can leverage for home improvements. With a cash-out refinance, you’ll refinance your current mortgage and get cash based on your level of equity, so long as you have (and can maintain) 20 percent equity. A cash-out refinance is generally a good idea if you can afford the closing costs, lower your mortgage rate and use the funds to add value to your home or make headway with other financial goals.
  • Home equity loan – A home equity loan functions similarly to a mortgage, allowing you to borrow money in a lump sum — with your home as collateral — and comes with a fixed rate and a term of up to 30 years. You can use the money for almost anything, including energy-efficiency upgrades. Depending on the lender, you’ll need at least 15 percent or 20 percent equity to qualify.
  • Personal loan – Personal loans are more expensive than home equity loans and mortgages in general, but they don’t rely on you having equity in your home and don’t put your home on the line as collateral. They’re also highly flexible, so you can use them to make home improvements. Many lenders won’t let you borrow large amounts, however, which may make it difficult to finance significant energy-efficiency improvements, like solar panels.

Learn more:

Written by
TJ Porter
Contributing writer
TJ Porter is a contributing writer for Bankrate. TJ writes about a range of subjects, from budgeting tips to bank account reviews.
Edited by
Mortgage editor
Reviewed by
Professor of finance, Creighton University
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