The FHA allows the purchase or refinance of a home along with the cost of energy efficient changes all in one mortgage. It’s called the FHA Energy Efficient Mortgage or EEM. This loan provides all of the financing you need in one loan, rather than forcing you to get a second loan to cover the cost of your energy changes. The EEM loan can help save you time and money.
The program has certain pros and cons that you should be aware of to help you decide if it’s right for you.
The Pros of the FHA Energy Efficient Mortgage
There are many benefits to the FHA EEM loan including:
The most important benefit of the FHA EEM loan is the fact that it is one loan. It takes away the cost, time, and headache involved in taking out another mortgage. Generally, you’d have to obtain one mortgage to purchase/refinance your home and a second loan, such as a HELOC to pay for the changes to the home. The FHA EEM makes it possible to handle everything with one loan. You have one loan to apply for, process, and close.
A Large Variety of Eligible Changes
The FHA EEM allows you to make a large variety of changes to your home. The most common include:
- New windows
- New doors
- The addition of solar panels
- Weatherizing windows or doors
- Installing solar water heater
- Installing new installation
- Installing programmable thermostats
Flexible FHA Guidelines
FHA loans are known for their flexible guidelines and the EEM loan is no exception. Because you don’t have to re-qualify for another loan, you get the same guidelines as you would with a standard FHA loan. In general, you need:
- 580 credit score
- 31/43 debt ratios
- Stable employment
- Steadily increasing or consistent income
- Proof of your income with paystubs, W-2s, and tax returns
The FHA loan allows slightly lower credit scores and higher debt ratios, making it easier to qualify.
FHA loans offer low interest rates and low closing costs. In addition, however, you are able to lower your utility bills, which saves you more money in the end. The energy efficient changes are meant to help your home use less energy, which means more money saved while you live in the home. You don’t have to put any more money down or have more equity, either. As long as you have 3.5% of your own money invested or 3.5% equity, you can add the energy efficient changes to the loan.
The Cons of the FHA EEM Loan
As with any program, there are some cons that you should be aware of to help you make the right decision.
Limited Loan Amount
The FHA restricts the amount of money you can borrow to make the energy efficient changes. As a part of the process, you’ll need an energy auditor to determine which changes will have the most effect on your home. Once your lender has this amount, they can determine the maximum amount you can borrow for energy efficient changes. The maximum amount is equal to the lessor of:
- The total of the energy efficient changes deemed necessary by the energy auditor
- 5% of the value of the property after the changes as determined by the appraiser
- 115% of the median price of the homes in the area
- 150% of the conforming loan limit
More Closing Costs
Even though FHA closing costs are generally lower than other loan programs, the EEM program has a few more costs involved. For starters, you have to pay the energy auditor for his inspection and report. Your lender may also charge higher origination fees or miscellaneous closing costs in order to make up for the extra work required on the EEM loan. You may be able to wrap the closing costs into the loan, but they still cost you in the end. In fact, if you wrap the costs into your loan, you pay interest on those costs, making them even higher.
Longer Time to Close
FHA loans are generally rather quick to get to the closing table. However, when you add the EEM component onto the loan, the lender has more work to do. They have to wait for the energy audit and then process it in order to determine your loan amount. This could add a few days to a few weeks to the entire loan process.
Pay Mortgage Insurance
All FHA loans require mortgage insurance. You’ll pay an upfront fee as well as annual mortgage insurance. The upfront mortgage insurance today is 1.75% of your loan amount. If you borrow $200,000, you’d owe $3,500 at the closing. You do have the option to roll the cost into your loan amount, however, remember you will pay interest on that amount making it even higher.
The annual mortgage insurance is worth 0.85% of your outstanding principal balance today. The lender pays the insurance on an annual basis on your behalf. They then charge you 1/12th of the amount each month. On the $200,000 loan, this means $142 per month. The amount will decrease slightly as you pay the principal down; however, the insurance lasts for the life of the loan.
The FHA Energy Efficient Mortgage is a great way to make changes to your home. However, you should know the pros and cons to help you decide if it’s right for you. It pays to compare all of your options to see which will cost you the least amount in the end, considering all costs, including interest.