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FHA Energy-Efficient Mortgages

In 1992 Congress mandated a pilot demonstration of energy-efficient mortgages (EEMs) in five States. In 1995 the pilot was expanded as a national program. FHA insured 16,000 EEMs in FY1998 (1.5 percent of total FHA loans) 30,044 EEMs in FY1999 (2.3 percent of total FHA loans) and 28,578 in FY2000 (3.1 percent of total FHA loans).

EEMs recognize that reduced utility expenses can permit a homeowner to pay a higher mortgage to cover the cost of the energy improvements on top of the approved mortgage. FHA EEMs provide mortgage insurance for a person to purchase or refinance a principal residence and incorporate the cost of energy-efficient improvements into the mortgage. The borrower does not have to qualify for the additional money and does not make a down payment on it. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, or savings and loan association, and the mortgage is insured by HUD.

Eligibility Requirements

  • The borrower is eligible for maximum FHA financing, using standard underwriting procedures. The borrower must make a 3-percent cash investment in the property. This 3- percent cash investment is based on the sales price. Closing costs are not included in the 3- percent calculation but may be used to satisfy the requirement. Any upfront mortgage insurance premium can be financed as part of the mortgage.
  • Eligible properties are one- to four-unit existing and new construction.
  • The cost of the energy-efficient improvements that may be eligible for financing into the mortgage is the greater of 5 percent of the property’s value (not to exceed $8,000), or $4,000.
  • To be eligible for inclusion in this mortgage, the energy-efficient improvements must be cost effective, meaning that the total cost of the improvements is less than the total present value of the energy saved over the useful life of the energy improvement.
  • The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report which is done by a home energy rating system or energy consultant. The cost of the energy rating may be financed as part of the cost-effective energy package.
  • The energy improvements are installed after the loan closes. The lender will place the money in an escrow account. The money will be released to the borrower after an inspection verifies that the improvements are installed and the energy savings will be achieved.
  • The maximum mortgage amount for a single-family unit depends on its location, and it is adjusted annually. As of January 1, 2001, for most parts of the country it was $132,000 for single-family homes. In high-cost areas it can be as much as $239,250. The cost of the eligible energy-efficient improvements is added to the mortgage amount. The final loan amount can exceed the maximum mortgage limit by the amount of the energy-efficient improvements.

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