January 16, 2014
Borrowers who choose the FHA Energy Efficient Mortgage (EEM) option as part of their FHA loan can get up to $8,000 in additional funds added to the loan amount for the express purpose of adding approved energy-efficient upgrades.
According to the FHA loan rules in HUD 4155.1 , Chapter Six, “Once the borrower and the property are determined eligible for FHA-insured financing, the lender, using the energy rating report and the EEM worksheet, determines the dollar amount of the cost-effective energy package that may be added to the mortgage amount. The cost of any improvement to the property that will increase the property’s energy efficiency, and that is determined to be cost effective, is eligible for financing into the mortgage.The cost that may be added to the mortgage amount is up to the greater of
• 5% of the property’s value, not to exceed $8,000, or
• $4,000.”
That money can go a long way toward improving the efficiency of a home. But what happens once the borrower decides this option is the right one to take? One part of the process involves determining the cost of energy improvements and estimating the savings of those improvements. According to Chapter Six,
“The cost of the energy improvements, including maintenance costs, and the estimate of the energy savings must be determined based upon a physical inspection of the property, or the plans and specifications of a house being built, by a home energy rater using HERS.
The rater must be trained to perform the physical inspection and/or diagnostic tests that provide the data on the property. The home energy rater, using the HERS, prepares a written home energy rating report, and provides copies to both the borrower and the lender.
The lender must include a copy of the HERS report and Energy Efficient Mortgage Worksheet in the closing package, placed behind Form HUD- 92900-LT, FHA Loan Underwriting and Transmittal Summary when requesting insurance endorsement.”
What is HERS? According to FHA.gov, HERS is “similar to a miles-per-gallon rating on a car. HERS are programs which provide evaluations of an individual home’s energy-efficiency.” The HERS rep or energy consultant is required to be independent from the FHA loan process. “He/she cannot be related directly or indirectly to the seller of the property, the prospective borrower, or the contractor selected by the borrower to install the energy efficient improvements.”
While all of this is happening, the lender is not necessarily required to suspend work on processing the loan until the results of these inspections and ratings are in. Chapter Six says the loan is, “underwritten as if the energy package did not exist, using standard FHA underwriting guidelines, qualifying income ratios, and maximum mortgage/minimum downpayment requirements, without regard to the energy package.”
Once the energy package HERS requirements are fulfilled, the lender will move forward with that portion of the loan paperwork.
Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.
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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