VA Home Loans: The Energy Efficient Mortgage (EEM) program


by John P. Allen, Direct VA Loan

The Energy Efficient Mortgage (EEM) program allows borrowers to upgrade the energy efficiency of the subject property and to finance the cost of the upgrades. The borrower may do this at the time of purchase or as a refinance if the borrower already owns the subject property.

The property must be an existing dwelling that is either being purchased or refinanced by the veteran. For IRRRLs, the veteran may certify prior occupancy as current occupancy is not required.

Acceptable energy efficient improvements include, but are not limited to, the following items: 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, and vapor barriers.


Maximum Allowable Cost of Improvements
The mortgage loan amount may be increased as follows: up to $3000 based solely on documented costs for energy efficiency improvements, up to $6000 provided the increase in the monthly mortgage payment does not exceed the likely reduction in monthly utility costs, more than $6000 subject to a value determination by VA, or up to the amount necessary to pay for materials, if labor is performed by the veteran.
vahomeloanMaximum Mortgage
Adding Cost of Improvements The cost of the improvements may be added to the loan amount, up to $6000.The appraised value may be exceeded by the amount of the energy efficient improvements on purchases and IRRRLs.For a regular refinance loan, the loan cannot exceed 90% of the reasonable value shown on the appraisal (NOV) plus the cost of the energy efficient improvements (value x .90 + cost of improvements).
Funding Fee Calculation
The funding fee is calculated on the full loan amount, including the cost of the energy efficient improvements.Underwriting IssuesGeneralIn addition to the underwriting issues listed below, the lender must determine the following:(1) If the proposed weatherization and/or energy conservation improvements are reasonable for the particular property, and (2) If the veteran’s ability to pay the increased loan payments caused by the addition of the improvements is satisfactory.
Increased Payments for Costs up to $3000
The lender must determine that the proposed energy efficient improvements up to $3000 meet the following requirements: normally offset by a reduction in utility costs, and based solely on the documented costs Increased Payments for Costs Between $3000 and $6,000 For energy efficient improvements that are more than $3000 but no more than $6,000, the lender must determine if the increase in the monthly mortgage payment does not exceed the likely reduction in monthly utility costs. The lender is expected to rely on locally available information provided by utility companies, municipalities, State agencies, or other reliable sources to make the determination. VA will accept the lender’s determination that the requirement is met.
Increased Payments for Costs Above $6000
The lender should carefully exercise discretion and consider the following points whenever the energy efficient improvements exceed $6,000: whether the increase in monthly mortgage payments exceed the likely reduction in monthly utility costs, whether the veteran’s income is sufficient to cover the higher mortgage payment, and documentation of VA’s valuation of the energy efficient improvements.A VA Certificate of Commitment, on a prior approval loan, issued prior to the decision to make energy efficient improvements over $6,000 must be returned to VA for a determination that the applicant still qualifies.
Increased Payments on an IRRRLIf the monthly payment (PITI) for the new loan, when adding the cost of energy efficient improvements, exceeds the PITI of the loan being refinanced by 20% or more, the veteran must qualify with the higher payment.
Regular Cash-Out Refinance Transactions
VA guidelines allow the cost of any energy efficient items to be included in the maximum loan calculation. However, DU does not capture the cost of energy efficient items; therefore you may need to perform the maximum loan calculation outside of DU.
Veteran’s Entitlement
VA will guarantee an energy efficient mortgage in the same proportion as a loan not including energy efficient improvements. However, the charge to the veteran’s entitlement will be based on the loan amount before adding the cost of energy efficient improvements. Reference: See the VA Lender’s Handbook (Section 7.03) for specific instructions on calculating the guarantee and entitlement for EEM loans.
Closing and Post Closing – Escrow for Improvements
General Energy efficient improvements should be completed when the loan is reported to VA. However, if the improvements cannot be completed prior to submitting the loan report to VA, the loan may be closed by establishing an escrow to assure completion.A formal escrow is not required for loans processed on a prior approval or automatic basis. Only the amount necessary to complete the improvements needs to be withheld and no additional documentation pertaining to the escrow funds needs to be submitted to VA.Generally, the improvements must be completed within 6 months from the date of loan closing. At that time, VA will expect the lender’s notification of completion or notification that funds were applied to reduce the loan balance.When the improvements have been completed, the lender must provide VA with a written notification of completion and that all escrow funds have been disbursed. The lender is responsible for verifying that all costs have been paid.If, after a reasonable period, the lender determines that the improvements will not be completed, the balance of the escrow funds should be applied as principal to reduce the loan balance and the Regional VA office must be notified.
Special Instructions for EEMS on IRRRL Transactions
VA allows a veteran to receive up to $6,000 of IRRRL loan proceeds as reimbursement for the cost of energy efficiency improvements completed within the 90 days immediately preceding the date of the loan. If the energy efficiency improvements are not completed prior to closing, the funds may be escrowed as mentioned in the “General” section above.Escrowed funds must be paid directly to the contractor(s) once the lender is satisfied that the work is properly completed. Escrowed funds may not be given to the veteran as reimbursement or payment.

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