I am going to make a bold statement: The "FHA Energy Efficient Mortgage" is the most underused and under appreciated loan products available in the mortgage world today. And the biggest reason is that very few people know about it. Thus, I write this blog post to inform the misinformed on one of the coolest (no pun intended) loan products out there.
The skinny on the FHA Energy Efficient Mortgage (EEM for short): The EEM is a way for buyers to upgrade the energy efficient products of the home (e.g heat and air conditioning, water heaters, windows, insulation, etc.) with an "add on" loan of up to 5% of the sales price. The idea is that you will save more money with the upgrades than the increased monthly payments from the higher loan amount.
Here is an example of how it works: So you find a great deal on a home that has lots of potential but also has a boiler from 1920, a rusty wood stove, a water heater from the Carter era, single pane aluminum windows that let the fresh air in, and sawdust insulation in the attic (i actually had sawdust insulation in my first house!) that has a better chance of starting a fire than actually insulating anything. This is where the EEM comes into play.
Let's say the purchase price is $100,000. You put 3.5% down to bring the loan amount to $96,500 (There is also upfront mortgage insurance of 1.75% but for the sake of focusing on the benefit of the EEM we will exclude it here). From the very start of the loan process you tell your lender that you want the EEM "add on" to upgrade the energy efficiency of the home. Your lender will then order a HERS report (Home Energy Rating System) from an FHA approved inspector. He does an audit on the home for its energy efficiency and will come up with some potential improvements and the estimated monthly savings for each.
The audit might say that new double pane windows will save the homeowner $30/month in heating costs or that 12 more inches of insulation in the attic will save the homeowner $15/month. The borrower will then get to choose which improvements they would like performed up to a cost of 5% of the purchase price. They might choose to just add the insulation which might cost $500.00. The money goes into an escrow account which is designated for the repairs which are done after closing. This $500 "add on" to the mortgage will raise the monthly payments by about $3/month but it will save the homeowners $15/month. Pretty sweet..right?!
The other nice thing about the EEM is that you don't have to qualify for the extra money because the lender realizes that it is saving you money. In fact, you may be able to qualify for a bigger loan because of the EEM.
I know that in my city Logan, Utah that there are hundreds of homes and homeowners that would benefit from an EEM. They just didn't know about it. One last thing...You don't have to purchase a home to take advantage of the EEM. You can do it through a regular refinance or a streamline FHA refinance. Give me a call if you have any more questions about it.
About the Author
John Neil is a loan officer that is passionate about his profession. His goal with every transaction is to make a customer for life. The result is that 95% of his business comes from referrals of satisfied clients. If you need a cache valley mortgage, you can contact John at 435-770-2709. You can also follow him on twitter @LoganUTMortgage or facebook @facebook/MortgageNerd
Great Post John. We at Valuation Solutions work with builders who offer new homes that are energy efficient under FHA and they have good appeal.
Moshe-
I'll bet that is very rewarding. It's not only good dollars sense but it is also better for the enviornment.