October 20, 2023
FHA refinance loan options include the ability to apply for a refi loan to do home improvements–a very important option for those with existing FHA mortgages or non-FHA loans alike.
That said, home loan interest rates are higher than they’ve been in a while at publication time and many think refinancing today isn’t a great option.
But what about when interest rates and the economy in general begin to improve? You may not be considering a refinance loan today, but when mortgage rates begin to fall, the option becomes more viable for many.
How can FHA refinance loans help a borrower make upgrades or improvements when the time is right?
There’s more than one way to approach the refinance loan question if you want a refi AND funds to perform approved upgrades or remodeling to your house.
Participating FHA lenders may offer a range of FHA loan products that can help in this area including the FHA Energy Efficient Mortgage program (EEM), and FHA Rehab loans.
Most of these options will require the borrower to work more closely with the lender to determine what may be funded using FHA refinance loans, but many projects are possible.
For FHA Energy Efficient Mortgages, borrowers can apply to add funds to the refinance loan for upgrades that result in lower utility bills, including approved solar heating systems, storm windows or doors, or other alterations.
The borrower will be required to discuss specifically how the upgrades will result in lower utility bills and efficiency, and all upgrades must be lender-approved.
FHA EEM loans are discussed in the FHA Single Family Home Loan rule book HUD 4000.1. That discussion includes the following about what is required to justify the upgrades/improvements in the proposed energy package.
The energy package is the set of improvements agreed to by the Borrower based on recommendations and analysis performed by a qualified home energy rater.
The improvements can include energy-saving equipment and active and passive solar and wind technologies.
The energy package can include materials, labor, inspections, and the home energy assessment by a qualified energy rater. If the Borrower desires, labor may include the cost of an EEM Facilitator (general contractor).
FHA EEMs must pass a cost-effective test. HUD 4000.1 advises that the financed portion of an energy package must be cost-effective.
A cost-effective energy package is one where the cost of the improvements, including maintenance and repair, is less than the value of the energy saved over the estimated useful life of those improvements. The lender will be responsible for making sure the improvements meet this requirement.
FHA EEMs are an option for FHA refinance loans, but an EEM isnt for everyone; some borrowers wish to refinance for other reasons such as getting into a lower mortgage payment.
But if your home needs upgrades to make it greener or more efficient, ask a participating lender about this important option.
We will discuss FHA rehab loan refinancing options in a future blog post.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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