November 4, 2010
Summer and winter conditions often bring higher utility bills, especially for those states where extremes of heat and cold make the seasons challenging. Texas, Arizona, North and South Dakota, Minnesota and other states all experience their own challenges in the dog days of summer and the extreme cold of December and January. FHA borrowers who live in areas with seasonally high utility bills will find help from the FHA in the form of the FHA Energy-Efficient Mortgage or EEM.
An EEM allows borrowers to build the cost of energy-efficient improvements or upgrades to a house into their FHA home loan. This is a program that started as an experiment in 1992 and expanded to a full-time national FHA loan option in 1995.
According to FHA requirements, “All persons who meet the income requirements for FHA’s standard Section 203(b) insurance and can make the monthly mortgage payments are eligible to apply.” Borrowers can apply for an EEM for single family homes and multi-unit properties, but can also add an EEM to streamline refinancing loans and other loan types. Unfortunately, co-op units do not qualify for this FHA program.
A borrower can include EEM terms in an FHA home loan only under the right conditions–FHA rules state the cost of the improvements must be “less than the total present value of the energy saved over the useful life of the energy improvement.”
To determine this, FHA requirements include a home energy rating report. The report must be written by a qualified energy consultant using a Home Energy Rating System. These reports aren’t free, but the FHA does allow the cost of the energy rating report and any required inspections to be included in the amount financed in the EEM.
One of the most important things to know about EEMs is when the improvements are paid for and installed. FHA guidelines state the upgrades or improvements must be installed after the loan has closed. Home buyers should not try to have improvements installed beforehand and have them reimbursed later without express instructions or permission from the lender.
One reason for this is found on the FHA official site, which states “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.”
The process of verification and payment to the borrower is contingent on the inspection; under the terms of a specific FHA loan, the improvements may be allowed to happen at the time specified in the contract, but money is only released to the borrower once it’s determined that the improvements do what they are supposed to do–save money and conserve energy.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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