Many homeowners are taking advantage of home improvement incentives that enable them to make their residence more energy efficient, reduce their utility bills and help save the environment. Some local utility companies are offering rebates to customers who replace older less efficient air conditioners, hot water heaters, and major appliances with more energy efficient models. In addition, the Federal Housing Administration (FHA) has created an Energy Efficient Mortgage program (EEM) to assist homebuyers or current homeowners in saving money on utility bills by allowing them to add the cost of purchasing energy efficient features to new or existing housing as part of their FHA insured home purchase or refinancing mortgage.
While not a lender itself, the FHA backs the EEM program to encourage lenders to make mortgage credit available to borrowers who would not otherwise qualify for conventional loans on affordable terms such as residents of poor neighborhoods where banks may be reluctant to lend or to first time home buyers.
Whether you do-it-yourself or hire a qualified professional, the cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating system (HERS) or an energy consultant. The cost of an energy inspection report and related fees may be included in the mortgage amount. The total cost of the energy efficient appliances or home improvements can be included in a borrower’s mortgage only if it is less than the total dollar value of the energy that will be saved over the life of the appliances.
A HERS rating will be conducted to determine what home improvements are needed to make the home more energy efficient and report will be prepared for the lender. A HERS report will typically include:
- An Overall Rating Index of the house in its present condition on a scale of 1 to 100 with 1 representing the greatest level of energy efficiency and 100 representing the least
- Cost-saving upgrades recommended by the energy specialist
- Estimated installation expense, annual savings, and projected life of the upgrades/appliances
- Before and after installation of upgrades annual total energy costs
- Improved Index Rating after the upgrades have been installed
After the mortgage closing process, the lender will set aside funds for the energy home improvements in an escrow account. The borrower must make the energy improvements after the loan closes and undergo an inspection from an authorized individual who verifies that the improvements were made/appliances installed and the energy savings will be achieved. Once that happens, the lender will release the additional funds to the borrower.