Pioneering Energy Efficiency in Arkansas

ENERGY EFFICIENT MORTGAGES - More Information


For New Homes

Energy Efficient Mortgages, also known as EEMs, make it easier for borrowers to qualify for loans to purchase homes that rate “energy efficient” (e.g. a certified ENERGY STAR Home). With an EEM, the qualifying ratio for borrowers can be expanded for houses that rate “efficient,” since the buyer will have more disposable income and can afford a larger house payment, allowing more borrowers to qualify for the loan. 

For Existing Homes

EEMs for existing homes are sometimes called “energy improvement mortgages” (EIMs) and allow borrows who qualify for a home loan to borrow additional money to make cost-effective improvements as evidenced by a certified home energy rater. The additional money for the improvements is rolled into the mortgage and paid off over the life of the loan. 

Depending on the appraised value and where the house is located, a  borrower can add from $4,000 up to $8,000 or more in energy improvements with NO additional money down and pay for the improvements over the life of the loan. The buyer selects a package of improvements that will meet the “cost-effectiveness” test—that is, the net present value of the package of improvements will exceed their installed cost.  A certified HERS Rater works with the homebuyer to provide the required loan file documentation. It requires an inspection and modeling of the home by the HERS rater using approved software to predict the savings and generate the forms for loan file documentation. 

The money for the improvements is put into escrow at closing. The improvements must be completed within 90 days. A final inspection is made at completion by the HERS rater to confirm the work has been done satisfactorily. The contractors are then paid out of the funds in escrow. 

An EIM is a right that is guaranteed by Congress for any buyer using an FHA or VA loan who can qualify for the base loan, but the buyer MUST ask for it.  It is rarely mentioned by the real estate agent or the lender because they either don’t know about them, have never done one, don’t know who to call, fear it will slow down the loan process or jeopardize the sale. It doesn’t have to do any of that, so ask for it!

Other Incentives

Lenders sometimes offer incentives when financing more energy efficient homes. For instance, Bank of America Mortgage offers up to $1,000 to cover closing costs for certified ENERGY STAR Homes with their Energy Credit™ Mortgage. There are also utility incentives that can help. ENTERGY offers its customers energy improvement incentive coupons through their Residential Energy Solutions Quick Start Program. The coupons are offered by their Partnering Contractors. CENTERPOINT Gas offers substantial incentives for high efficiency gas water heaters and furnaces. Other utilities do the same. These incentives can reduce the cost of of improvement measures allowing more measures to be included in the EEM. 

Loan file documentation

Loan file documentation requires a HERS Rating Report. The certified home energy raters at HERS, Inc. can pool utility incentives with a cost-effective energy improvement package, provide the necessary inspections and documentation, provide final inspections and quality control to ensure improvements are installed correctly. 

EEM/EIM Steps:

  1. Buyer contacts a HERS, Inc. and puts them on alert they may be doing an Energy Improvement Mortgage and may need an EIM energy rating inspection.
  2. Buyer makes loan application to a mortgage company that can do an EIM if requested.
  3. Buyer gets qualified for a loan to buy a house.
  4. Buyer reserves the right to do an EIM when signing the EIM disclosures. This will be one of many disclosures and things to sign. 
  5. Buyer contracts to buy the house.  
  6. Buyer calls for a HERS Rating inspection. The rater will need info on the house and contact info for the real estate agent who will typically let them in the house.
  7. The HERS Rater inspects the house. 
  8. Buyer reviews improvements options with the rater and gets bids for possible energy improvements.
  9. Buyer works with the HERS Rater to select a package of improvements that will meet the cost-effectiveness test. 
  10. HERS Rater submits the loan file documentation to the lender with copies of contractors bids and rater invoices for a) rating  inspection and EIM loan documents plus b) Final Inspection. 
  11. 1Lender closes the loan and escrows improvement money and pays HERS rater for the inspection and EIM loan documents. 
  12. Contractors are told to complete the work.
  13. HERS Rater does a Final Inspection and confirms to the lender the work is complete
  14. Lender (or title company) releases the escrow and pays contractors for work and pays the HERS Rater for the Final Inspection.

 

NOTE: The HERS Rater is often contacted after an offer has already been made on a home and the closing date set. This can work, too, so long as there is sufficient time for the rating inspection and bids to be collected and the required loan file documentation sent to the lender.  And for even more information!