May 13, 2013
The FHA Energy-Efficient Mortgage (EEM) option is available for borrowers who want to apply for additional money to be used for energy-efficient upgrades on the home being purchased or refinanced with an FHA mortgage.
An FHA EEM is subject to certain rules and requirements, especially when paired with a Streamline Refinance. For example, one of the requirements of a Streamline Loan is that the borrower must get a benefit from the refinance–usually in the form of lower interest or monthly payments.
But with some FHA EEMs, the payments may actually go up. Is this permitted under the rules?
HUD 4155.1 spells out when those higher payments may be allowed–the guidence is found in Chapter Six, Section D. Under “Streamline Refinance Transactions with EEM” where you’ll find the following:
“For a streamline refinance with EEM, the borrower’s principal and interest (P&I) payment on the new loan, including the energy package, may be greater than the P&I payment on the current loan, provided the estimated monthly energy savings shown on the HERS report exceeds the increase in the P&I.”
When a borrower applies for a Streamline Refinance loan–with or without an FHA EEM–there is no FHA-required appraisal. The lender is free to require one, but in cases where the financial institution does not, how does the bank calculate the value of the home?
Chapter Six says, “On a streamline refinance without an appraisal, the original principal balance substitutes for an appraised value.”
FHA EEMs require the borrower and the lender to work together to justify the improvements to be paid for under the new mortgage, to include getting a Home Energy Rating and determining how much money could be saved by the improvements. In this part of the process, borrowers should know that they are responsible for the fees associated with the energy rating, required inspections, and any testing needed.
Chapter Six reminds borrowers considering an FHA EEM that, “FHA does not set the fees for the Home Energy Rating, including the physical inspection, the HERS Report, and any post-installation test. The fees charged to the borrower for the Home Energy Rating must be customary and reasonable for the area.”
Such fees and expenses, “may be included and financed as part of the energy package if the entire package, including those fees, is cost-effective. If not, such fees are considered closing costs.”
Do you have questions about FHA loans? Ask us in the comments section.
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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