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.
- The borrower is eligible for maximum FHA
using standard underwriting procedures. The borrower must make a
3.5% cash investment in the property. This 3.5% cash
investment is based on the sales price. Closing costs are not included
in the 3.5% 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
and new construction.
- The cost of the energy-efficient improvements
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
- To be eligible for inclusion in this mortgage,
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
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
- The energy improvements are installed after the
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
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.