December 10, 2010
FHA Energy Efficient mortgages are available to any borrower taking out an FHA mortgage on a single family home (co-op units aren’t eligible for an EEM) who meets FHA income requirements for the FHA Section 203(b) loans.
In order to get an FHA EEM loan, energy efficient improvements must be selected and the amount of energy savings calculated on a monthly basis. The calculations must be done by a Home Energy Rating System expert or consultant, and the buyer will pay a fee to have this work done. Fortunately the cost and any associated fees can be included into the FHA EEM.
An FHA Energy Efficient Mortgage can be used for existing and new properties, and may be included in FHA Streamline Refinance loans. In all cases the borrower is required to make a down payment of 3.5% at the time of this writing. The Up front mortgage insurance premium can be financed under current rules.
The FHA has a formula for calculating how the energy efficient improvements may be financed. According to the FHA, “The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the lesser of A or B as follows:
A. The dollar amount of cost-effective energy improvements, plus cost of report and inspections, or
B. The lesser of 5% of: the value of the property, or 115% of the median area price of a single family dwelling, or 150% of the conforming Freddie Mac limit.”
The buyer must wait to install energy efficient improvements until after the loan has closed. One of the most important aspects of the FHA Energy Efficient Mortgage is how the funds are disbursed. The bank puts the EEM loan money in escrow, and transferred to the borrower only after an inspection is done to verify all EEM improvements have been properly installed and completed.
This means the borrower is not only responsible for paying for the initial cost of the upgrades, but that the loan money the borrower is counting on to offset the expense of those upgrades could be delayed if the inspection isn’t done in a timely manner.
Borrowers should anticipate such issues and budget accordingly. Don’t make financial plans based on immediate payment of the EEM funds. While many home owners may not experience delays in getting the home inspected, in periods of high demand there may be a wait for a qualified inspector to become available.
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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