- Home Improvement Loan - Donald Joski
Energy Efficient Mortgages were created by Congress in 1992 as a pilot demonstration and subsequently expanded three years later as a national program.
An Energy Efficient Mortgage is a mortgage loan that is funded by a traditional lending institution and is insured by the Federal Housing Administration. Borrowers do not have to qualify for the additional funds and no additional down payment is required. The thinking behind this is that the money saved on the consumer’s utility bills will offset any increase in the monthly mortgage payments.
Home Remodeling Loans
FHA provides borrowers with two different mortgage programs that utilize the EEM. The first loan program is FHA’s popular Section 203(b) Mortgage Insurance for one to four family homes. Homes in that qualify for this program are eligible for up to 96.5 percent financing and borrowers are able to fold the closing costs and mortgage insurance premiums into the mortgage.
Other types of loans that utilize the EEM are the FHA Section 203(k) Rehabilitation loan program and HUD’s Title I Home Improvement Loan program. Section 203(k) loans are designed to assist homebuyers in the repair and rehabilitation of single family properties. The Title I Home Improvement Loan program insures loans to finance moderate rehabilitation of single-family or multi-family properties.
Eligibility Requirements for FHA Home Improvement Loans
Borrowers are eligible for an EEM for the maximum FHA insured loan amount for their area and standard underwriting procedures are determined if a borrower is qualified. A 3.5 percent down payment based on the sales price or appraised value is required at closing. Mortgage insurance premiums may be financed as part of the total mortgage package.
One to four family unit structures are eligible and can be either existing or new construction. Energy Efficient Mortgages may also be added to some other types of loans and streamline refinances.
The cost of the eligible energy efficient improvement(s) that may be financed into the mortgage is the lesser of either A or B as follows:
A. The dollar amount of cost-effective energy improvements, plus cost of report and inspections, or
B. The lesser of 5% of:
- 150% of the conforming Freddie Mac limit.
- The Value of the property, or
- 115% of the median area price of a single family dwelling, or
- The cost of the energy improvements and estimate of the energy savings must be determined by a home energy rating report that is prepared by an energy consultant using a Home Energy Rating System (HERS).
How are Improvements Funded
FHA maximum mortgage limits for single family dwellings are determined by location. Maximum limits are adjusted annually and can be found at the U.S. Housing and Urban Development’s website. The cost of eligible energy efficient improvements is then added to the mortgage amount and can exceed the maximum mortgage limit by the amount of the improvements.
Improvement costs must be determined by a home energy rating report using the Home Energy Rating System (HERS). Energy efficient upgrades are installed after the loan closes. Funds for enhancements are placed in an escrow account with either the closing company or closing attorney’s office. Funds are released to the borrower or contractor after an inspection is verifies that the upgrades are in place and energy savings will be reached. The cost of the rating report as well as the inspections may be financed as part of the cost of the energy improvement package.
Homeowners are encouraged to make energy efficient improvements to their existing properties and the Energy Efficient Mortgage Program is just one of the many programs offering financial assistance. Borrowers can apply for FHA insured energy efficient mortgage by contacting an FHA approved lender in their area.
Sources:
Homes and Communities U.S. Department of Housing and Urban Development,
www.hud.gov
Katrina Rief-Derrico - Katrina Rief-D'Errico is a freelance writer living just outside of Atlanta, Georgia. She is a real estate and residential construction ...
