Energy-efficient mortgages, explained

Many homeowners spend thousands of dollars a year on energy bills and pay considerable amounts in monthly utility payments. Energy-efficient mortgage (EEM) programs allow homeowners to “go green” and enjoy significant savings. With an EEM, current and prospective homeowners can finance energy-efficient upgrades in new and existing homes.

While Rocket Mortgage^® doesn’t offer EEMs, we can explain their benefits and point you to a few alternatives.

What is an EEM?

An EEM – sometimes referred to as a green mortgage – is a loan product that allows you to finance energy-efficient improvements in your home for favorable terms. You can combine an EEM with a conventional, Federal Housing Administration (FHA) and Department of Veterans Affairs (VA) mortgage. EEMs allow you to roll the cost of the upgrades into your mortgage or refinance to make eco-friendly and money-saving upgrades to your home.

Why get an energy-efficient mortgage?

A common circumstance for an EEM is when a borrower buys an older property with an energy-inefficient HVAC system, drafty windows, a malfunctioning furnace or other structural features that can use energy-saving improvements. A home buyer may use an EEM to purchase an energy-efficient home, and a homeowner may use it to refinance a mortgage to fund energy-efficient upgrades.

What is the benefit of an EEM?

The energy-efficient mortgage program can increase your borrowing power because your lender can issue a loan that covers the home’s total value and the cost of your energy-efficient upgrades. Whether you’re buying or refinancing a home, an EEM can be helpful for buyers with conventional or government-backed loans.

Types of EEM programs and what they finance

Home buyers can pick from several EEM loan programs. Each type offers unique features and benefits and has different eligibility requirements.

The FHA loan energy-efficient mortgage program

With a minimum 3.5% down payment, FHA loans are a popular mortgage choice for buyers. The FHA allows qualified borrowers to fold the additional cost of improvements into their loan amount once it’s verified that the projected energy savings will be higher than the total cost of the improvements. While borrowers must satisfy the standard FHA loan requirements, they won’t need to qualify for the additional amount to finance the energy-efficient improvements.

Under the terms of an FHA loan, you can increase your total loan amount to cover your improvements. Lenders will factor in several variables to determine the additional loan amount. You’ll be required to have a home energy assessment done. Depending on the cost of the improvements included in the assessment, the FHA may cover the costs upfront or contribute 5% of the lowest value among the following factors:

• The adjusted property value
• 115% of the median area price of a single-family home
• 150% of the national conforming mortgage limit

What do FHA EEMs finance?

The energy package is the central component of the FHA’s EEM program. The package lists the FHA’s approved home upgrades, including:

• Replacing older appliances, such as refrigerators or washing machines, with energy-efficient appliances that are ENERGY STAR^®-certified
• Installing upgraded HVAC systems, such as new furnaces, air conditioners or heat pumps
• Replacing your windows with high-performance double- or triple-glazed windows
• Installing renewable energy sources, such as solar panels and water heating or wind turbines
• Making insulation enhancements for walls, floors, attics and basements
• Sealing and weatherization to address issues such as leaks and drafts
• Improving water heating systems with tankless, solar or heat pump water heaters
• Upgrading lighting fixtures with LEDs
• Installing smart energy systems, such as smart thermostats or energy management systems

The FHA energy package focuses on lowering energy usage to produce a smaller carbon footprint and bigger cost savings.

Cost-effective requirements of energy-efficient mortgages

The cornerstone of the FHA EEM program is energy-efficiency. It’s so central to the program that it’s in the name.

Upgrading your home to maximize energy-efficiency can be a substantial upfront investment. However, the long-term savings on utility bills can outweigh the cost, especially when you use an EEM to finance your home improvements. To qualify for an energy-efficient mortgage, the long-term savings you get with utility bills must offset the cost of the upgrades.

For existing homes, this means improvements must pay for themselves over time. For newly constructed homes, the upgrades must exceed the energy efficiency standards set by the International Energy Conservation Code (IECC).

The VA loan energy-efficient mortgage program

A VA-backed EEM offers favorable terms to qualifying active-duty service members, veterans and surviving spouses. The VA energy-efficient mortgage shares similar requirements and covered upgrades with the FHA program. VA energy-efficient upgrades typically can’t cost more than $6,000 on top of the approved VA loan amount, and homeowners must complete the upgrades within 6 months of closing on the home.

What do VA EEMs finance?

The VA energy-efficient mortgage program can finance:

• Solar heating and cooling systems
• Sealing and weatherization, like caulking and weather-stripping
• Gas and electric furnace upgrades are limited to replacement burners, boilers or furnaces
• Clock thermostats
• New or additional attic, wall, ceiling and floor insulation
• Water heater insulation
• Thermal windows or doors, heat pumps and vapor barriers

Contact your closest VA regional loan center for a comprehensive list of approved upgrades.

Conventional energy-efficient mortgage programs

Fannie Mae’s and Freddie Mac's conventional EEM terms are the most generous of all EEM programs. You can borrow your conventional mortgage amount and up to 15% of the home’s appraised value to spend on energy-efficient improvements.

What do Fannie Mae EEMs finance?

Fannie Mae energy-efficient mortgages, also known as the HomeStyle Energy mortgages, can finance:

• Improvements in energy-efficiency, such as smart thermostats, improved HVAC systems, weatherization and insulation, water heaters and energy-saving windows and doors
• Water-efficiency improvements such as water-saving toilets and low-flow faucets and shower heads
• Renewable energy sources, such as solar panels, wind and geothermal power
• Home resilience readiness projects, such as foundation retrofitting for earthquakes, storm surge barriers and retaining walls
• Existing home improvement debt from Property Assessed Clean Energy (PACE) loans, credit cards and home equity lines of credit (HELOCs)

You can learn more about HomeStyle Energy mortgages on Fannie Mae’s website.

What do Freddie Mac EEMs finance?

Freddie Mac’s GreenCHOICE Mortgages^® can finance energy-efficient improvements, such as:

• Programmable thermostats
• Weatherization and caulking
• The addition of ceiling, wall and floor insulation, including air sealing
• Air conditioning and heating (HVAC) replacement for higher-efficiency units
• Solar water heaters
• High-efficiency refrigerators, freezers, light bulbs and water heaters, including low-flow water fixtures
• Replacement of doors and windows

You can learn more about GreenCHOICE Mortgages^® on Freddie Mac’s website.

EEM eligibility requirements

Homeowners must meet several lender requirements to secure an energy-efficient mortgage, including satisfying the minimum credit requirement and documentation guidelines and verifying that the energy-efficient improvements are cost-effective.

To be cost-effective, the upfront price of the energy-efficient upgrades must be less than your expected energy savings over time.

To qualify for an EEM, an energy consultant must conduct an energy audit. The audit uses the Home Energy Rating System (HERS) to measure your current energy-efficiency and estimate your potential energy savings after the upgrades. The cost of energy-efficient home improvements can also include generating the energy rating report and conducting related inspections.

A lender will consider your estimated savings on your energy bills as part of your qualification and underwriting process, and aspiring homeowners must also meet the financial requirements of their mortgage loan type.

When an EEM is a good choice

EEMs are typically best suited for homeowners who want to save on utility bills and want long-term value. They’re also popular with buyers who want to invest in home solar panels and other cost-effective technologies.

Alternatives to an EEM

If you don’t qualify or an EEM isn’t what you’re looking for, you can use other options to fund your energy-efficient home improvement projects.

• Cash-out refinance: You can swap out your existing mortgage for a larger mortgage and pocket the difference to fund your eco-friendly upgrades.
• Home equity loan: With a home equity loan, you can withdraw a portion of your equity and convert it to cash to finance your energy-efficient improvements.
• Personal loan: You can use a personal loan to fund your energy-efficient home improvement projects, but you’ll likely pay a high interest rate.

Complementary FHA energy-related EEM programs and policies

If a personal loan, home equity loan or cash-out refinance doesn’t work, the Federal Housing Administration offers complementary EEM programs or policies that may align with your goals.

• Section 203(k) rehabilitation mortgage: You can combine an EEM with a Section 203(k) rehabilitation loan, stacking improvements from the energy package over the improvements you can make with a 203(k) loan.
• Energy Efficient Homes (EEH): If your home meets Energy Efficient Home (EEH) standards, the FHA will stretch borrowing limits by 2%, which may help you qualify for a larger loan. You can use the stretch ratios with any FHA insurance Title II program.
• Solar and wind technologies: The program allows borrowers to increase their mortgage amount to cover the installation of new wind or solar energy systems when purchasing or refinancing a home.
• Weatherization: You can finance up to $3,500 to cover weatherization items, such as thermostats or insulation.

The bottom line

With an EEM, you can reduce energy consumption and potentially save thousands on utilities. Homeowners can buy the home of their dreams and outfit it with energy-efficient home upgrades or overhaul outdated home systems.

Rocket Mortgage doesn’t currently offer EEMs, but they offer EEM alternatives that can generate the same money-saving, eco-friendly results. If you’re interested in an alternative loan type, you can start your mortgage application online today. You can also give them a call at (833) 326-6018.