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All About Energy Efficient Mortgages (EEM)

What is an Energy Efficient Mortgage?

Energy efficient mortgages or EEM’s are a type of loan that credits a home based on its current energy efficiency.  In order to be considered energy efficient, a tool, appliance, heating, or cooling system needs to simply use less energy than its basic, and less efficient, counterpart. An EEM gives lenders the power to extend the borrower’s debt-to-income qualifying ratio, which means that they may be able to take out a larger loan for their home. 

Insuring EEM’s

A Federal Housing Association (FHA) EEM provides mortgage insurance to the borrower who is looking to purchase or refinance their home and incorporate the costs of energy efficient improvements into their mortgage. The borrower does not have to qualify for additional money, and is not required to make a down payment on the EEM loan. 

The limitations put on the FHA EEM loan totals can change based on the cost of energy effective improvements a person makes to their home. The maximum amount that can fluctuate is whichever of these options is smallest. The lesser of 5% of: property value, 115% of the average single family home in the area, and Veterans Administration (VA) EEM’s.  The only limitations with VA EEM’s is that they are only available to veterans and qualified military personnel, and the loan cut offs are between $3-6000. 

When it comes to making a decision on having an Energy Efficient Mortgage there are things to look at, such as insurance for the mortgage itself.  It would be wise for a homeowner to have mortgage insurance if they have: not so great credit, a low down payment for the home (under 20%), needed financial assistance, and if the homeowner is interested in a lower rate, lenders are likely to assist in your needs because you have insurance.

The homeowners who don’t need to apply for insurance are those who are planning on paying at least a 20% down payment and have good credit, as they could possibly find a better deal with a private lender.  Also, insurance is not needed if the home owner wants to avoid the government required insurance premium of 1% of the home’s total value.

Benefits of EEM’s

Energy efficient improvements will start to become more and more common, as current home owners and future homebuyers begin to realize what the value of an Energy Efficient Mortgage is. Not only are these green improvements better for our environment, but they could also help to save the money in home owners’ pockets. Perhaps the short-term investment is too much for some to handle at first, but when they look at and consider what they’ll save in utilities down the road, they will be much happier.   Because Energy Efficient products will only help to raise the value of a home, more and more people are looking at the big picture and are making the investment to purchase an energy efficient home, as it will be easier to resell in the future. 

About the author:  Mark Scheets is a writer for the Total Guide.  Be sure to check out our Energy Efficient Mortgage guide.