HUD Energy-Efficient Mortgages - How do they Work?

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The HUD Energy-Efficient Mortgage or EEM by Jamie Woods

In 1992, Congress mandated a pilot demonstration of Energy Efficient Mortgages (EEMs) in five states. Because of the program's success, in 1995 the pilot was expanded as a national program.

EEMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage. FHA EEMs provide mortgage insurance for a person to purchase or refinance a principal, owner-occupied residence and incorporate the cost of energy efficient improvements into the mortgage.

The borrower does not have to qualify for the additional money and does not make a down payment on it! The mortgage loan is funded by a lending institution, such as a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD. FHA insures loans. FHA does not provide loans.

ELIGIBILITY REQUIREMENTS:

- The approved borrower(s) need 3.5% equity or down payment in an owner-occupied property.

- Eligible properties are one to four unit existing and new construction.

- The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the greater of 5 percent of the property's value (not to exceed $8,000), or $4,000.

- To be eligible for inclusion in this mortgage, the energy efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.

- The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report (or "HERS"), which is done by a home energy rating system or energy consultant. The cost of the energy rating may be financed as part of the cost effective energy package. Normally,an official from your local utility company will conduct the HERS.

- The energy improvements are installed after the loan closes. The lender will place the money in an escrow account. The money will be released to the borrower after an inspection verifies that the improvements are installed and the energy savings will be achieved. This program works very well with the HUD/FHA 203(k) Home Improvement loan as well.

- The maximum mortgage limit for a single family unit depends on its location and it is adjusted annually. The cost of the eligible energy efficient improvements is added to the mortgage amount. The final loan amount can exceed the maximum mortgage limit by the amount of the energy efficient improvements.

In summary, "going green" can be easy as pie and well worth the applications and underwriting, so long as your situation is handled by an adept team of professionals who understand the procedures and guidelines!

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