Longtime homeowners know that old windows, inefficient heating systems, poor insulation and other energy drains can take a significant — that is, expensive — toll on your annual utility costs.
Investing in upgrades and technologies that boost energy efficiency can save homeowners a healthy chunk of change in the long run. As with other lending options, VA borrowers can look to obtain an Energy Efficient Mortgage (EEM), which allows qualified buyers to add into their purchase or refinance loan the cost of acceptable energy improvements.
VA Energy Efficient Mortgages can be a solid investment for veterans and their families, especially those planning to stay in the home for a while. Spending money at the outset on energy improvements can ultimately lower heating, cooling and other related energy costs for years to come.
That monthly savings can be funneled into additional payments to the mortgage principal or dozens of other household necessities.
3 Cost Tiers for EEMs
There are three cost tiers of VA energy efficient mortgages:
1. Improvements totaling $0 – $3,000: This is the easiest tier to get approved. You will generally need to provide a copy of a contractor bid or quote itemizing the costs and you will need to provide manufacturer information for each product.
2. Improvements totaling $3,001 – $6,000: In addition to the information required in the first tier, you'll also have to obtain an energy audit showing a year’s worth of utility cost averages for the home. These documents will then be reviewed to determine if the proposed EEM improvements will make a significant enough impact on the utilities to be cost effective.
3. Improvements of $6,001 and up: It’s difficult to obtain an EEM greater than $6,000 and requests for this tier have to be approved by the lender and the VA.In addition, it's important to understand that financing the cost of acceptable energy efficiency improvements cannot count toward meeting the minimum loan amount necessary for VA loans utilizing second-tier entitlement.
The veteran typically has six months after closing to get the improvements completed. Small fixes can be taken care of before closing. otherwise the lender may decide to open an escrow account for the improvement funding.
There’s standard language on a VA appraisal that explains to veterans their ability to secure an energy efficient mortgage. That same section also notes that the buyer may want to consider paying for a home energy audit, a key step that kick-starts the process.
If you plan to pursue an EEM between $3,000 and $6,000 you’ll need to provide a Home Energy Rating System (HERS) report or an energy audit from the local utility company. The HERS report will document how efficiently a home is operating and where improvements can be made. The HERS scale ranges from 0-150, the lower the number the more efficient a home is functioning. The standard for new homes is a 100 HERS score.
The fee for an HERS report is typically around $300-800, but this cost can be covered by seller or buyer. Veterans can check with their local utility companies to see if there are free or reduced-cost energy audits available. Private firms may also offer discounts for military members, veterans and their families. As with any in-home service like this, make sure you hire a legitimate company with a proven track record.
An EEM can be used towards a variety of home improvements. But it's important to understand the limitations involved when it comes to acceptable energy efficiency improvements.
For example, veterans can’t use an EEM to install an energy-efficient swimming pool, appliances or make cosmetic upgrades to the property.
Some acceptable EEM improvements include:
- Thermal windows and doors
- Insulation for walls, ceilings, attics, floors and water heaters
- Clock thermostats
- Solar heating and cooling systems
- Furnace modifications
- Heat pumps
- Vapor barriers, storm windows/doors
- Caulking and weather-stripping
There are also some items that will not be considered under an EEM:
- Energy Star rated appliances
- A/C units
- Vinyl siding
- New roof or shingles
Improvements typically need to be considered permanent to the property. Window air conditioning units wouldn't be considered permanent, and adding central air conditioning to a home wouldn't likely increase a home's energy efficiency.
Talk with lenders if you have questions about what improvements might be allowed.
3 Ways of Using an EEM
Energy Efficient Mortgages credit a home’s energy efficiency in the home loan. The credit from an EEM can be used in 3 ways:
- You can use an EEM on an already energy efficient home. The VA home loan allows up to $6000 more on a loan if the home meets the energy efficient standards of the HERS. This can be the extra boost your mortgage needs.
- You can use an EEM to buy an older home that needs energy improvements. Improvements like thermal windows and insulation can be applied so the home meets HERS standards.
- You can refinance into an EEM if your current home needs energy improvement. If you have an outdated home that needs energy improvement, consider the benefits of refinancing under an EEM.
EEM homes will have increased comfort and protection against heat, cold, moisture, and pollution. In the long run, an EEM can pay terrific dividends and reduce your carbon footprint. But every buyer's situation is different.
Depending on the property and your particular interest, talk with a Veterans United loan specialist about your energy efficiency options.