Mortgage Video & Blogging Community

Spokane Washington home buyers, how’d you like to shut out the drafts in that old home you’re looking at, or install a new heating and air system.  Or replace all the old windows with new dual pane models?

An Energy Efficient Mortgage (EEM) can do just that.  And better yet, you do not have to qualify for the increased mortgage payment associated with the improvements, nor does the cost of the improvements need to be included in the appraisal.  EEM’s are eligible to be used with all types of financing but the predominant program is FHA.  Conventional and VA borrowers can utilize the EEM but under more restrictive options.

The purpose of the EEM is to allow the Washington homeowner or homebuyer to finance cost effective improvements that will lower your monthly utility bills.  Since the resulting improvements will lower your obligation by more than the increased mortgage payments you do not have to qualify for the incremental increase in the loan amount.

You are allowed to finance a minimum of $4,000 of improvements and no more than the greater of 5% of the home’s value or $8,000.  Adding $8,000 to your mortgage equates to a payment increase of only about $60.  The EEM allows you to finance this extra expense because it is expected you will save more than that in monthly utility bills.

How does the program work?  First you have to find a lender that offers the loan program because not all do.  Once you have a home under contract or know you want to refinance your existing home you notify your lender that you are interested in the EEM.  You will need to pay for a Home Energy Rating System (HERS) report prepared by a licensed inspector or energy consultant.  The cost of the report is generally around $300 to $500.

The HERS report will identify the property’s current energy efficiency and then a list of improvements which would qualify to be included in the EEM.  Finally, the report details the expected costs savings over the expected useful life of the improvements.   The improvements can be included in your new mortgage as long as of the total costs equates to less than the present value of the resulting energy savings.  You can pick and chose which improvements you chose to make and are not required to complete everything that is recommended.

Typically a licensed contractor will work hand in hand with the HERS inspector to make sure the actual costs to install match the HERS report.

The energy improvements must be installed within 60 days after the loan closes. The lender will place the money in an escrow account, and will disburse it after an inspection verifies that the improvements are installed as planned.

Since the Energy Efficient Mortgage has been around since 1995 you’d think it would be more popular. Unfortunately it is a victim of Sales 101 – there’s extra work involved for the lender but no additional income.  Then there’s the headache and cost of administering the escrow hold back – a relatively unique, costly, and manual process lenders hate.  Most loans fund and then are sold to Fannie Mae or Freddie Mac within days.  With an EEM the lender has to hang onto that loan for at least 60 days until you’ve finished the improvements.  There’s also the risk that the improvements are not completed or done correctly, opening up an entirely new can of worms.

The Energy Efficient Mortgage is an excellent program for financing (either purchasing or refinancing) common energy upgrades to older homes.  It is relatively simple, for the borrower, and only adds a few hundred dollars to the loan costs.

FOR MORE INFORMATION – Call us at 509-252-9151 or send an email to mmullin@theloanconsultant.com.  The conversation is free and we’d be honored to help!