Energy-efficient mortgage: A guide for borrowers

Homeowners commonly spend thousands of dollars every year on utilities. Energy-efficient mortgage (EEM) programs allow homeowners to finance the costs for energy-efficient upgrades either when purchasing a home or refinancing an existing mortgage. When buying or refinancing with an EEM, you can include the cost of eligible energy-efficient improvements in the loan, giving you access to favorable home loan rates for the purchase.

While Rocket Mortgage^® doesn’t offer EEMs, we can explain the benefits of working with energy-efficient mortgage lenders and walk you through alternatives to energy efficient mortgage loans.

What is an energy-efficient mortgage?

An EEM, sometimes referred to as a green mortgage, is a loan that allows you to finance energy-efficient improvements in the same loan as your home, potentially giving you access to much lower-cost financing than you could get elsewhere. You can combine an EEM with the most popular government loan programs, such as conventional, Federal Housing Administration (FHA), or Department of Veterans Affairs (VA) mortgages.

EEMs allow you to roll the cost of the upgrades into your mortgage or refinance to make eco-friendly and money-saving upgrades more affordable. For example, if you’re buying an older home and want to install new, environmentally friendly windows, you can get a larger loan with an EEM and use the difference to pay for the upgrades.

You can also refinance your mortgage with an EEM and use the proceeds for efficient plumbing, HVAC, insulation, and other green home improvements.

Types of energy-efficient mortgage programs

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

FHA loan energy-efficient mortgage program

The FHA’s EEM program is available to borrowers with a 15-year or 30-year FHA loan with at least 3.5% home equity or a 3.5% down payment. The loans are offered for detached homes, townhouses, and eligible condominiums.

The improvement must be deemed “cost-effective,” demonstrating that the home improvement will pay for itself over time, and cannot exceed 5% of the property’s value, up to an $8,000 limit.

Credit scores and other requirements apply to FHA loans, but they may allow you to get an EEM with more flexible terms. Learn more about FHA loans to better understand if the program could make sense for your homeownership goals.

What do FHA EEMs finance?

The list of potential projects you could use funds from an FHA EEM for is extensive. While you must stay within FHA EEM guidelines, potential projects could include:

• ENERGY STAR appliances
• Renewable energy sources
• Sealing and weatherization
• Insulation enhancements
• Smart energy systems
• LED lighting
• Tankless or solar water heaters
• High-performance windows
• HVAC systems

Remember, the program’s focus is on lowering energy use and maximizing savings. Improvements for new homes must exceed the International Energy Conservation Code requirement, and existing home improvements must pay for themselves over time.

VA loan energy-efficient mortgage program

The VA’s loan program also allows for energy-efficient mortgages. This add-on program is for eligible military households, veterans, and surviving spouses looking to make money-saving efficiency improvements as part of a mortgage loan for a new purchase or an Interest Rate Reduction Refinancing Loan (IRRRL).

The VA loan program limits borrowers to $6,000 for EEM-related borrowing. Improvements must be completed within six months of closing the loan to be eligible for EEM funds.

What do VA EEMs finance?

You should always seek approval at the start of the EEM process to ensure your upgrade is covered. For the VA, you can contact your regional VA loan center with specific questions.

Examples of covered projects could include:

• Sealing and weatherization
• Clock thermostats
• Insulation
• Solar heating and cooling
• Gas and electric furnace upgrades
• Thermal doors and windows

USDA Single Family Housing Guaranteed Loan Program

While the USDA Single Family Housing Guaranteed Loan Program isn’t specifically an energy-efficient mortgage, it can help low-income to moderate-income home buyers fund eligible rural home purchases and upgrades, and those can include efficiency. Even outside of EEMs, many efficiency upgrades are a good investment regardless.

Down payment, income, and property requirements vary by location. If you’re looking at a home in a suburban or rural area, you may want to learn more about USDA loans.

Conventional energy-efficient mortgage programs

Conventional mortgages are loans conforming to standards set by Fannie Mae and Freddie Mac, large government-sponsored enterprises (GSEs) that play an important role in the mortgage industry.

With a conventional mortgage, you can borrow up to 15% of the property’s appraised value for green improvements. That’s a generous limit compared to other EEM programs.

What do Fannie Mae EEMs finance?

You can use a Fannie Mae HomeStyle Energy Mortgage for more than just energy efficiency projects. You can also use this energy-efficient mortgage for projects that make your home more resilient against climate change, buy ENERGY-STAR^® certified products, and more. Allowed uses include:

• Upgrades to energy and water systems, including solar panels, wind power devices, and geothermal systems
• Basic weatherization (e.g., insulation, sealing, etc.) and water-efficient items (up to $3,500)
• ENERGY STAR^®-certified products
• New windows and doors for improved efficiency
• Resiliency upgrades to protect against natural disasters, including:
  • Storm surge barriers
  • Foundation retrofitting for earthquakes
  • Hazardous brush and tree removal in fire zones
  • Retaining walls for mud or water flow prevention
• Radon remediation
• Environmental hazard damage repairs
• Paying off energy-related debt, including:
  • Entire PACE lien amounts (for purchase or refinance)
  • Prior energy-related improvements (up to 15% of property value with refinance)

The Fannie Mae HomeStyle website is the best place to find the latest details. You may find that even some past purchases are eligible, even if you paid for them with a HELOC or other loan.

What do Freddie Mac EEMs finance?

Freddie Mac offers the GreenCHOICE mortgage, its version of an EEM. GreenCHOICE is very similar to HomeStyle from Fannie Mae. The project can also be for up to 15% of the home’s appraised value, and other conventional mortgage terms apply.

Examples of projects eligible for a Freddie Mac GreenCHOICE mortgage include:

• Programmable thermostats
• Caulking and weather stripping
• Ceiling, wall, or floor insulation
• Air sealing
• High-efficiency air conditioning and heating system replacements
• Solar water heaters
• Low-flow water fixtures
• High-efficiency refrigerators, freezers, water heaters, and light bulbs
• Replacement of windows and doors

To learn more, visit the official Freddie Mac GreenCHOICE loan website.

EEM eligibility requirements

Homeowners must meet lender requirements to be approved for an energy-efficient mortgage, including minimum credit score requirements, documentation guidelines, and verifying that the energy-efficient improvements are cost-effective.

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

For some EEM programs, an energy consultant must conduct an energy audit as part of the application process. The audit uses the Home Energy Rating System (HERS) to measure your current energy efficiency and estimate your potential energy savings after the proposed EEM-funded 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 applicants must also meet the financial requirements of their mortgage loan type.

Is an EEM right for you?

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.

Even if you don’t want an EEM, if an efficient upgrade will pay for itself through utility savings or home appreciation, the project could be a worthwhile undertaking.

However, if you don’t plan on staying in the home for at least a few years, there’s a good chance you won’t break even on the EEM. Make sure you plan to stay in the home long enough to earn back your energy-efficient investment before committing to an EEM.

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, such as projects backed by your home equity or personal loans.

Cash-out refinance

With a cash-out refinance, you can swap out your existing mortgage for a new, larger mortgage and pocket the difference to fund your eco-friendly upgrades. If you’ve owned your home for several years and have built up equity, a cash-out refinance could be a good solution.

Look at the interest rate and other costs when deciding whether to refinance or keep your existing loan.

Home equity loans and lines of credit

With a home equity loan, you can withdraw a portion of your equity and convert it to cash to finance your energy-efficient improvements. A traditional home equity loan is an installment loan, sometimes called a second mortgage, that’s paid off with fixed payments. A HELOC allows you to borrow up to a credit limit. With both a HELOC and home equity loan, your loan is backed by the value you’ve built up in your home.

Personal loans

Unlike the other options we discussed, a personal loan is typically an unsecured loan. Personal loans commonly offer a fixed monthly payment over a set period, but they’re not attached to your home or any other collateral.

With no collateral, however, you can expect to pay a higher interest rate. Comparing risks and costs is key when deciding on a home equity loan or a personal loan for a home improvement project.

Complementary FHA options

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 fit 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.

FAQ

When shopping for an energy efficient mortgage, these are among the most common questions:

Do energy-efficient mortgages offer tax advantages?

Paying for eligible green upgrades may qualify you for federal home energy tax credits, which can reduce your overall tax liability. These credits often apply to improvements like solar panels, insulation, and high-efficiency appliances. Learn more about home improvement tax deductions.

How can I find energy-efficient mortgage lenders?

Start by researching lenders that specialize in energy-efficient mortgages, such as those offering FHA Energy-Efficient Mortgages (EEMs) or programs like Fannie Mae’s HomeStyle^® Energy and Freddie Mac’s GreenCHOICE^®. Compare rates, terms, and experience with green loans. These are similar steps to choosing a mortgage lender, regardless of whether you want an EEM loan.

How much can I borrow with an energy-efficient mortgage?

The amount you can borrow depends on your income, credit profile, property value, and loan program limits. In many cases, the cost of energy upgrades can be financed on top of the home’s appraised value, provided they meet program guidelines.

Can I use an energy-efficient mortgage to upgrade an existing property?

Yes, if you already own a home, you can use a refinance loan to roll the cost of qualifying energy-efficient upgrades into your mortgage. This allows you to make improvements while spreading the costs over the life of the loan.

What does “cost-effective” mean for energy-efficient mortgages?

In this context, cost-effective means that the projected savings from the energy improvements are expected to justify the upfront costs. Lenders often assess whether the upgrades will reduce utility expenses enough to cover the project cost.

The bottom line: An energy-efficient mortgage can be worth it for the potential savings

Energy-efficient mortgages can be a powerful tool for homeowners who want to invest in their homes and their future. By financing upgrades that can lower utility costs, boost comfort, and increase your home’s value, these loans can make sustainable living more accessible. They’re available through popular programs like FHA, VA, USDA, and conventional mortgages, giving many borrowers a chance to align their housing goals with their values.

Even though Rocket Mortgage^® doesn’t currently offer energy-efficient mortgages, Rocket Mortgage offers other loan options.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.