What is an energy efficient mortgage

what is an energy efficient mortgage

Now & Later

Energy Efficient Mortgage (EEM)

This is a type of loan that credits a home based on its current energy efficiency. In order to be deemed energy efficient, a tool, appliance, heating, or cooling system will simply use less energy than its basic, less efficient counterpart. An EEM gives lenders the power to extend the borrower’s debt-to-income qualifying ratio, so that he or she may take out a larger loan for their home.

To qualify for an EEM, a home energy rater will conduct an official energy rating of your home. This rating will be based on a scale of 1-100, with a lower score representing a more energy efficient home. Obviously, the lower your score, the higher your chance of getting your EEM loan approved.

An EIM is a type of loan that is used for homes that intend on installing green modifications in the near future. The borrower promises to install green modifications once they have legally purchased the home. This type of mortgage will not require the borrower to make a larger down payment, but rather use the utility bills to finance the energy efficient improvements. Just like an EEM, a home energy rater must evaluate your home before the lender determines how much to lend you.

Now & Later

Energy Efficient Mortgage (EEM)

This is a type of loan that credits a home based on its current energy efficiency. In order to be deemed energy efficient, a tool, appliance, heating, or cooling system will simply use less energy than its basic, less efficient counterpart. An EEM gives lenders the power to extend the borrower’s debt-to-income qualifying ratio, so that he or she may take out a larger loan for their home.

To qualify for an EEM, a home energy rater will conduct an official energy rating of your home. This rating will be based on a scale of 1-100, with a lower score representing a more energy efficient home. Obviously, the lower your score, the higher your chance of getting your EEM loan approved.

An EIM is a type of loan that is used for homes that intend on installing green modifications in the near future. The borrower promises to install green modifications once they have legally purchased the home. This type of mortgage will not require the borrower to make a larger down payment, but rather use the utility bills to finance the energy efficient improvements. Just like an EEM, a home energy rater must evaluate your home before the lender determines how much to lend you.

Insuring your Mortgage

Federally insured mortgage programs sponsor both EEMs and EIMs. The Federal Housing Association (FHA) and Veterans Administration (VA) are among the more popular insurers today.

Conventional EEMs

This is the basic option for taking out an EEM. The lender will have a certain amount of power to adjust the borrower’s income by a dollar amount that is equal to the estimated energy savings on the house. In return, the borrower will be allowed to take out a larger loan. This option is especially beneficial if the borrower does not have a lot of disposable cash.

FHA EEMs

A FHA EEM provides mortgage insurance to a borrower who intends to purchase or refinance a home, and to incorporate the costs of energy efficient improvements into their mortgage. The borrower does not have to qualify for additional money, and is not required to make a down payment on the loan.

The restrictions put on the FHA EEM loan amounts can be altered based on the cost of energy effective improvements that you make to your home. The maximum amount that this alteration can fluctuate is whichever of these options is smallest: the lesser of 5% of:

  • The value of the entire property
  • 115% of the median area price of a single-family home (the average price of similar homes in your area)
  • 150% of the conforming Freddie Mac limits
  • VA EEMs

VA EEMs are only available to qualified military personnel, reservists, and veterans. This loan can be used for energy improvements to a preexisting home, but the loan limit cuts off between $3,000 and $6,000 depending on the energy value of the home.

Be advised that the FHA and VA do not actually provide borrowers with loans; they only ensure the loans that the borrowers receive from lenders.

Is it Worth It?

You may be wondering if the additional cost of mortgage insurance is worth it. It’s a fair question considering that insurance is not necessary for everyone. Insurance provides the lenders with protection, protection from you making late payments or defaulting on your loan altogether. The insurance allows borrowers who would have a tough time qualifying for a mortgage loan, to have an easier time qualifying for said loan. If your income can support your initial down and monthly payments, then you should not apply for mortgage insurance.

You should not apply for mortgage insurance if:

  • You have enough cash set aside to make the 20% standard down payment on a home.
  • Your credit is in good standing, because you can probably get a better deal elsewhere with a private lender.
  • You want to avoid the government-required insurance premium of 1% of the home’s total value. The government demands this payment at the closing of every FHA loan.

You should apply for mortgage insurance if:

  • You have lousy credit, and are having a tough time finding a lender.
  • Your financial situation will only allow you to pay a lower down payment. FHA mortgage insurance only requires you to pay 3.5% down on the house, rather than the standard 20% down payment with conventional loans.
  • You need assistance through gifts. Parents, family members, and friends can help you cover your payments if your loan is FHA insured.
  • You are interested in a lower interest rate. Lenders are much more likely to honor your request for a lower rate because they are protected through the insurance.

You will want to choose the type of FHA insurance that will be the best fit for you financially. Yes, there is more than one type.

FHA Section 203(b) Mortgage Insurance for 1-4 Family Homes

Anyone who intends on treating their newly purchased home as their primary residence may apply for this insurance. Under Section 203(b), the borrower can finance up to 96.5% of their home. The main reason for this is to avoid paying a hefty 20% down payment. The FHA also limits the amount that lenders can charge borrowers in fees. For example, lenders may not charge borrowers more than 1% of the total mortgage in processing fees. This insurance does require the borrower to pay an annual premium.

FHA Section 203(k) Rehab Mortgage Insurance

When your home needs repairs, you will be glad to know that you can work around the complicated and costly process of taking out a loan. Section 203(k) allows borrowers to avoid high interest rates, short-term payment options, and accumulating interest. What you will be able to do with this insurance is finance a new home, or refinance an existing home, and the cost of its rehabilitation through a single mortgage, rather than taking out multiple loans.

To qualify for this insurance, you will simply need to prove to the lender that you will be able to meet your monthly payments. The lender will likely assess your credit history to determine if you would be a good fit. By consolidating numerous loans into one, you and your lender can agree on a single, long-term, fixed-rate mortgage, or adjustable rate mortgage that will work financially for both of you. A portion of this loan is used to pay off the seller of the house, or to pay off your current mortgage if you are refinancing. The remaining funds are held in an escrow account, and are released when the rehabilitation of the home is complete.

The condition to taking out this loan is that the rehabilitation must cost at least $5,000, but the total property value of the home (cost before rehabilitation plus the cost of rehab, or 110% of the appraised value after rehab, whichever is less) must remain within the FHA mortgage limit for your specific area. This limit can be found online.

Streamlined 203(k) Limited Repair Program

This program allows buyers to finance up to $35,000 more into their mortgage for energy efficient upgrades and improvements, before they move into the house. An inspector will have to assess your intended improvements so that the lender will have a better idea of how much money to lend you.

Title I Home Improvement Loan

This loan is designed by the HUD to protect lenders from losing money on their loans. The loan requires all borrowers to be in high credit standing, and to have the ability to meet all of their monthly payments, in full, and on time.

For the borrower, you will not have to worry about prepayment penalties, so if you want to pay off the loan in less time, you have the power to do so. You will have to wait at least 90 days from the completion, and occupation of your home before you apply for this loan.

Considering that the FHA operates under the HUD (Dept. of Housing and Urban Development), there are requirements set in place to ensure that properties that are financed under these programs meet certain basic energy efficiency and structural standards.

Greener Is Better

After considering all of the available options for financing, it seems as if energy efficient improvements will start to become more and more common, as homebuyers begin to realize their value. Not only are these green improvements better for our environment, but they also help to save the money in our pockets. Perhaps the short-term investment is too much for you to handle, but when you consider what you will save in utilities down the road, the scale appears to be tipped in your favor. This is especially the case if you intend to sell your home. Energy efficient products will only help to raise the value of your home.

Source: www.totalmortgage.com

Category: Credit

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