II.A.8.c. Energy Efficient Mortgages (09/14/15)

Owned by Kacey Olson
Nov 21, 2018
6 min read

© HUD Single Family Housing Policy Handbook 4000.1

Included in this section are:

i. Definitions
ii. Eligibility
iii. Standard
iv. Home Energy Report/Assessment
v. Maximum Financeable Energy Package
vi. Maximum Mortgage Amount
vii. Underwriting
viii. Appraisals
ix. Cash-Out
x. Energy Efficient Mortgage Escrows
xi. Completion Requirements for Energy Efficient Mortgages
xii. Inspection

i. Definitions

The Energy Efficient Mortgage (EEM) program allows the Mortgagee to offer financing for cost-effective energy efficient improvements to an existing Property at the time of purchase or refinancing, or for upgrades above the established residential building code for New Construction.

Cost-Effective refers to the costs of the energy efficiency improvements that are less than the present value of the energy saved over the estimated useful life of those improvements.

ii. Eligibility

(A) Eligible Property TypesEEM may be used with:

  • New Construction Properties (one- to four-units);
  • Existing Construction Properties (one- to four-units);
  • condominiums (one unit); or
  • Manufactured Housing.

(B) Eligible Programs and Transactions TypesThe EEM program can be used in conjunction with any mortgage insurance under Title II, including:

  • 203(b)
    • Purchase
    • No cash-out refinance
  • 203(h) Mortgage Insurance for Disaster Victims
  • 203(k) (Standard and Limited)
  • Weatherization Policy (Existing Construction only)

iii. Standard

Energy Package

The energy package is the set of improvements agreed to by the Borrower based on recommendations and analysis performed by a qualified home energy rater. The improvements can include energy-saving equipment, and active and passive solar and wind technologies. The energy package can include materials, labor, inspections, and the home energy assessment by a qualified energy rater. If the Borrower desires, labor may include the cost of an EEM Facilitator (general contractor).

(A) Cost-Effective TestThe financed portion of an energy package must be cost-effective. A cost-effective energy package is one where the cost of the improvements, including maintenance and repair, is less than the value of the energy saved over the estimated useful life of those improvements.

(B) Cost-effective Test for New ConstructionFor New Construction, the financed portion of an energy package includes only those cost-effective energy improvements over and above the greater of the following:

  • the requirements of the 2006 International Energy Conservation Code (IECC), or a successor energy code standard that has been adopted by HUD for its Minimum Property Standards (MPS), pursuant to 42 U.S.C. § 12709; or
  • the applicable IECC year used by the state or local building code for New Construction.

More information on this energy code can be obtained from the Department of Energy or the International Code Council.

(C) Changes to the Energy Package after Mortgage ClosingIf the work that is done differs from the approved energy package, a change order along with a revised home energy audit must be submitted to the Direct Endorsement (DE) underwriter for approval. If the changes still meet the cost-effective test, no further analysis is required. If not, the funds for the work not included in the approval energy package must be used to pay down the mortgage principal.

iv. Home Energy Report/Assessment

The Borrower must obtain a home energy assessment. The purpose of the energy assessment under the EEM program is to identify opportunities for improving the energy efficiency of the home and their cost-effectiveness. The assessment must be conducted by a qualified energy rater, assessor, or auditor using whole-home assessment standards, protocols and procedure.

(A) Qualifications of Energy Raters/AssessorsQualified home energy raters/assessors must be trained and certified as one of the following:

  • Building Performance Institute Building Analyst Professional;
  • Building Performance Institute Home Energy Professional Energy Auditor;
  • Residential Energy Services Network Home Energy Rater; or
  • energy rater, assessor or auditor who meets local or state jurisdictional requirements for conducting residential energy audits or assessments, including training, certification, licensure and insurance requirements.

The home energy report must reflect one of the above professional credentials by the rater/assessor.

(B) Home Energy ReportThe home energy report reflects recommendations of energy-saving improvements for the Borrower’s consideration. Included with the recommendations are estimates of energy savings and cost-effective analysis for each of the suggested improvements. These estimates consider energy costs in today’s dollars (present value). The Mortgagee must use the energy-savings information from the home energy report to determine that the cost-effective test is met for the financed energy package.

(C) Home Energy Report for New ConstructionOn newly constructed housing, the home energy report must identify improvements that are over and above the greater of the following:

  • the requirements of the 2006 IECC, or a successor energy code standard that has been adopted by HUD for its MPS, pursuant to 42 U.S.C. § 12709; or
  • the applicable IECC year used by the state or local building code for New Construction.

(D) Required DocumentationThe Mortgagee must obtain a copy of the home energy report. This report must not be greater than 120 Days old.The Mortgagee must submit two forms HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary as described in the Underwriting Section below.

v. Maximum Financeable Energy Package

The maximum amount of the energy package that can be added to the Base Loan Amount is the lesser of:

  • the dollar amount of a cost-effective energy package as determined by the home energy audit; or
  • the lesser of 5 percent of:
    • the Adjusted Value;
    • 115 percent of the median area price of a Single Family dwelling; or
    • 150 percent of the national conforming mortgage limit.

Energy Efficient Mortgage Calculator Tool

The Mortgagee must calculate the dollar amount of a cost-effective energy package as determined by the home energy audit, as shown in Energy Package. The EEM Calculator, located in FHA Connection (FHAC) on the Case Processing screen, will perform the calculation of Maximum Financeable Energy Package. The EEM Calculator uses data entered for the Mortgage to calculate the maximum energy package.

For a Streamline Refinance, the EEM Calculator uses the appraised value from the initial transaction, contained within FHA Connection records, as the Adjusted Value.

vi. Maximum Mortgage Amount

The maximum final Base Loan Amount is determined by adding the maximum financeable energy package amount to the initial maximum Base Loan Amount. For New Construction, the cost of the financeable energy package must be subtracted from the sales price when computing the Adjusted Value.

When utilizing an EEM in conjunction with a 203(k) or Weatherization, the items included in the maximum financeable energy package must be excluded from the items included when calculating the initial maximum Base Loan Amount under these programs.

The maximum FHA Nationwide Mortgage Limit for an area may be exceeded by the maximum financeable energy package.

vii. Underwriting

The Mortgagee must calculate the Borrower’s debt ratios using the initial Base Loan Amount plus the portion of the Upfront Mortgage Insurance Premium (UFMIP) attributable to the initial Base Loan Amount.

(A) TOTAL Mortgage ScorecardFor purposes of submission to the Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard, the Mortgagee must utilize the initial Base Loan Amount prior to the addition of the financeable energy package.If the Mortgagee obtains an Accept or Approve on a mortgage application that does not include the financeable energy package, FHA will recognize the risk rating from TOTAL Mortgage Scorecard and permit the increase to the Mortgage Payment without re-underwriting or rescoring. The Mortgagee must provide a form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary, without the financeable energy package, showing the qualifying ratios in the case binder. A second form HUD-92900-LT must be completed by the underwriter showing mortgage amount calculation that includes the financeable energy package, as reflected in FHAC. The second form must also be included in the case binder.The underwriter must attest on the second form HUD-92900-LT that they have reviewed the calculations associated with the energy efficient improvements and found the Mortgage and the Property to be in compliance with FHA’s underwriting instructions.

(B) Manual UnderwritingThe Mortgagee must provide a form HUD-92900-LT, without the financeable energy package, showing the qualifying ratios in the case binder. A second form HUD-92900-LT must be completed by the underwriter showing mortgage amount calculation that includes the financeable energy package, as reflected in FHAC. The second form must also be included in the case binder.The underwriter must attest on the second form HUD-92900-LT that they have reviewed the calculations associated with the energy efficient improvements and found the Mortgage and the Property to be in compliance with FHA’s underwriting instructions.

viii. Appraisals

For Existing and New Construction, the appraisal does not need to reflect the value of the energy package that will be added to the Property. If the appraisal does include the value of the energy package, the value must be subtracted from the Property Value when computing the Adjusted Value.

On the 203(k) program, the After Improved Value is to be used for the EEM process.

ix. Cash-Out

The Borrower may not receive cash back from the mortgage transaction. If an excess exists, funds must be applied to the principal Mortgage balance.

x. Energy Efficient Mortgage Escrows

For all Mortgages on existing Properties, except 203(k), if the energy package items are not complete by the time of closing, the Mortgagee must establish an escrow account for the remaining cost of the energy improvements in accordance with the Repair Completion Escrow Requirements.

(A) 203(k)If the energy package is part of a Section 203(k) Rehabilitation Mortgage, then the escrowed amounts of the energy package must be included in the rehabilitation escrow account.

(B) Borrower LaborEscrows may not include costs for labor or work performed by the Borrower (Sweat Equity).

(C) Form HUD-92300, Mortgagee’s Assurance of CompletionWhen funds to complete the energy package are escrowed, the Mortgagee must execute form HUD-92300, Mortgagee’s Assurance of Completion, to indicate that the escrow for the energy package improvements has been established.

xi. Completion Requirements for Energy Efficient Mortgages

With the exception of 203(k), the energy package is to be installed within 90 Days of the mortgage Disbursement. If the work is not completed within 90 Days, the Mortgagee must apply the EEM funds to a prepayment of the mortgage principal.

For 203(k) Mortgages, the Mortgagee must follow the 203(k) Escrow Guidance.

xii. Inspection

The Mortgagee, the rater, or an FHA Roster Inspector may inspect the installation of the improvements. The Borrower may be charged an inspection fee.