June 17, 2011
Making improvements in a new home to include energy efficient upgrades can save a borrower a lot of money in utility bills. Modern windows, solar powered water heaters, improved air conditioning systems and other upgrades are all within a borrower’s reach when purchasing a home with an FHA insured mortgage thanks to a feature called the Energy Efficient Mortgage.
FHA Energy Efficient mortgages are for qualified borrowers buying a single family home. Under the terms of an FHA Energy Efficient Mortgage or EEM for short, energy efficient improvements must be selected by the borrower and the amount of energy savings the improvements would give every month.
There must be a tangible benefit to the borrower in terms of energy efficiency and/or savings for each improvement.
These savings must be calculated by a Home Energy Rating System expert or consultant, who must be contracted at the borrower’s expense. These costs can be rolled into the FHA loan.
The FHA has a formula for calculating how the energy efficient improvements may be financed. The FHA official site says “The cost of the energy efficient improvements that may be eligible for financing into the mortgage is the lesser of…the dollar amount of cost-effective energy improvements, plus cost of report and inspections, or…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.”
It’s important for the borrower to know that under the FHA EEM program, the energy efficient improvements cannot be installed until the loan has closed and the borrower has legal ownership of the home. Once that has happened, the lender transfers EEM loan money to an escrow account.
That money is transferred to the borrower after EEM upgrades have been accomplished and an inspection has been performed to insure the upgrades have indeed been made and properly installed.
The FHA borrower is responsible for paying the initial cost of the improvements and gets reimbursed once the inspection has been completed. Borrowers should budget for this accordingly and allow for a reasonable amount of time to pass before getting reimbursed once the upgrades and inspection are complete–in times of high demand there may be a wait for a qualified inspector to become available, which could delay your payback. It’s important to prepare financially for this contingency should you decide to get an FHA Energy Efficient Mortgage.
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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