EVERYTHING YOU EVER WANTED TO KNOW about the VA ENERGY EFFICIENT MORTGAGE NMLS #1109426-1-
WHAT IS AN ENERGY EFFICIENT MORTGAGE? An Energy Efficient Mortgage (EEM) is a loan that covers the cost of making energy efficiency improvements to a dwelling. An EEM is not a stand-alone loan; rather, it is made as an add-on to a VA loan for a new purchase or a VA refinance. The amount borrowed for the EEM is considered part of the purchase or refinance and is allowed on all types of VA loans. EEMs can only be used for the very-specific purpose of reducing the veteran borrower s utility bills by making the home more energy efficient. Many borrowers first hear about the EEM when they receive the Notice of Value (NOV) following the official VA appraisal of the property. The NOV has the following notice to the veteran: Notice of Value The buyer may wish to contact a qualified person/firm for a home energy audit to identify needed energy efficiency improvements to the property. In some localities, the utility company may perform this service. The mortgage amount may be increased as a result of making energy efficiency improvements such as: Solar or conventional heating/cooling systems, water heaters, insulation, weather-stripping/caulking, and storm windows/doors. Other energy related improvements may also be considered. The VA strongly encourages all borrowers to look into energy-efficiency improvements to their home and even have a home energy audit conducted. Having energy efficiency improvements made to your home can literally save you thousands of dollars in utilities expenses. -2-
WHAT ARE THE REQUIREMENTS FOR EEMS? The VA Lender s Handbook offers a list of things that can always be approved for an EEM (as long as the borrower is qualified for the increased loan amount). Acceptable uses are not limited by the things on this list; if you have an improvement to your home that you d like to do but it does not appear on this list, consult with a VA-approved lender to see if your improvement qualifies. Here is the list: solar heating systems, including solar systems for heating water for domestic use solar heating and cooling systems caulking and weather-stripping furnace efficiency modifications limited to replacement burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights clock thermostats new or additional ceiling, attic, wall and floor insulation water heater insulation storm windows and/or doors, including thermal windows and/or doors heat pumps vapor barriers While the above list covers most of the improvements that a homeowner would do to lower their utility bills, it doesn t cover all of them. For example, in more rural areas, installing a wood-burning stove or a fireplace can be a legitimate way of reducing your heating bills. While a lender would be concerned with the cost vs. benefit of installing a wood-burning stove, it could be a possibility. -3-
WHAT ARE THE REQUIREMENTS FOR EEMS? (CONTINUED) As mentioned before, an EEM is considered part of the main loan, and as such is secured by a first lien on the home. For you first-time home buyers out there, a lien is essentially the right to use your home as collateral to secure the loan you got to purchase the property. You legally own the home, but the holder of your lien can sell your home if you default on your loan. There may be more than one lien on your home, depending on whether you have a second mortgage or another debt that has a lien on your home. If there is more than one lien on your home, they are referred to as first, second and so on in the order of the claim they have on the home in the event that you default on your obligations to more than one of the lien holders. The VA loan program requires that all VA loans be secured by a first lien on the property, and that includes the funds that are provided as an EEM. Why does this matter? This matters because the overall debt that must be paid off in order to remove all liens on the property can t be higher than the reasonable value of the home (as determined in the VA appraisal), plus the EEM. Granted, if this is going to be a problem, it s likely to be a problem regardless of whether you apply for an EEM, but it s a good thing to be aware of just the same. The VA has some requirements as to how much money can be spent on an EEM and under what circumstances. Up to $3,000 can be spent based on nothing but the documented costs of the improvements. The rationale here is that just about any improvements you can do that would cost $3,000 will save you at least $100 per year for the next 30 years. However, if you want to spend more than $3,000, it is required that the estimated monthly utilities savings be compared to the increase in the monthly mortgage payment and be found to be equal or higher. The normal limit on an EEM is $6,000, though in special cases approved by the VA, more can be used. Your lender will treat your EEM differently depending on how much money the EEM is for. If the EEM is for $3,000 or less, they will not require anything beyond the basic information about the improvements. For EEMs that are for more than $3,000 but less than $6,000, the lender will need to take whatever steps necessary to determine that the increase in your monthly mortgage payments due to the $6,000 is not larger than the monthly utilities cost savings. Usually the lender can rely on information and estimates provided by utility companies or local or state agencies to make a determination. -4-
WHAT ARE THE REQUIREMENTS FOR EEMS? (CONTINUED) Another thing to keep in mind is that if you are planning on performing the labor by yourself, only the amount necessary to pay for materials will be loaned. The normal limit on EEMs is $6,000, which is usually enough for one or two large improvements, or up to dozens of small ones. If you have a lot of improvements you d like done to the home, and you re handy enough to do many of them yourself, you can get a lot of value out of that $6k. The lender is responsible for determining that the proposed improvements are reasonable and viable for both the property and the requested loan amount. In the event that a borrower has improvements exceeding $6,000, the lender will need to be thorough and meticulous in determining two things: that the cost savings of the improvements will be enough to at least offset (preferably exceed) the addition to the monthly mortgage payment due to the extra loan amount, and that the veteran s income is sufficient to cover the higher loan payment. When you get beyond $6,000, it becomes a significant addition to the loan, and is likely to bump the loan out of the affordability range for the veteran borrower. The lender will need to get approval from the VA before clearing the higher amount. -5-
HOW DO I GET THE FUNDS FROM AN EEM? Let s move on to how the money from an EEM is paid out. In many cases, the improvements are made after the loan has been approved but before loan closing. If this is the case, usually the borrower initially pays out of his or her pocket and is reimbursed at closing. To be reimbursed through an EEM, the borrower needs to have done the improvements no more than 90 days before the closing date (they need to be fairly recent). If the improvements are not finished prior to closing, the lender can either establish an escrow or earmark an account with the funds and close the loan. You should be aware that a formal escrow is not required and that only the amount needed to complete the improvements can be withheld. Your lender will explain the particulars to you if you find yourself in this situation. The VA has a loose requirement that the improvements be completed within 6 months of closing the loan. There are exceptions to the 6-month rule, but additional reporting must be done to the VA. Your lender will fill you in on this if you get in this situation. You will need to keep your lender notified of the progress of the improvements because he or she is required to notify the VA when the improvements are completed, and will also be instrumental in making sure the EEM funds are properly applied to the cost of improvements. 90 DAYS 1 2 3 4 5 6 MONTHS Also, your lender has the power to determine that the improvements are not going to be completed and apply the unused balance to pay off principal in your loan. If your lender has not gotten any updates or notifications from you in a long time, and is unable to confirm that the improvements are making progress, you may find yourself in a frustrating situation. Your lender will be a very important person to keep in the loop while these improvements are being done. Remember that an EEM can be added to almost any VA loan, including new purchase loans, cash-out refinances, and Interest Rate Reduction Refinance Loans (IRRRLs). VA LOAN + EEM -6-
PAPERWORK, DOCUMENTATION, AND SUPPLEMENTAL INFORMATION In conjunction with the considerations the lender has at different loan amounts, different documentation is required depending on the amount of the EEM. For improvements up to $3,000, the VA only needs to see evidence that the improvements will cost the amount that the borrower is taking. Getting your lender a copy of bids you ve received for the work in question will usually suffice. For loans up to $6,000 and more than $3,000, you still need only supply the evidence of the cost of the improvements, and the lender gets whatever documentation is needed to compare the utilities savings with the extra monthly payment. For improvements over $6,000, your lender will explain what is needed in your case. As a borrower, you should be aware that getting an EEM along with your VA loan will affect the amount of guaranty that your lender is eligible to receive in the event that you default on your loan. While this doesn t affect you directly, it s always best to know what s going on on the other side of the desk. What is also good for you to know is how an EEM affects the amount of entitlement that you are using for your VA loan. Luckily, the answer is quite simple: it doesn t. The amount of entitlement used on your VA loan stays the same even if you get an EEM. Consider the following example the Handbook provides: If a veteran has full entitlement and applies for a loan of $80,000, plus $6,000 in energy efficiency improvements, VA will guarantee 40 percent of the full loan amount of $86,000. Thus, the dollar amount of the guaranty will be $34,400, even though the charge to the veteran s entitlement is only $32,000. Even though the addition of the EEM does not affect your entitlement, it does affect the amount you are charged for the VA funding fee. The amount of the EEM is added to the total loan amount to calculate the funding fee due at closing. -7-
CONCLUSION Getting an EEM can be a great way to improve your home and save money on utilities at the same time. Getting up to $3,000 should be fairly easy, getting up to $6,000 can be done with only a little homework, and even more than $6,000 can be received if you are willing to do your due diligence and have a lot of improvements to make. Whether you re looking to be more green in your daily living or just hoping to save some money on your utilities (or both), the EEM that the VA allows for is one of the best ways to do it. VISIT: LOWVARATES.COM TO LEARN MORE Call us toll-free at 866-LOWVARATES (866-569-8272) Chat Live on the Website Online at LowVARates.com NMLS #1109426-8-