Energy-Efficient Mortgage (EEM): What It Is and How It Works
An energy-efficient mortgage (EEM), also known as a “green mortgage,” is a planet-friendly home loan that allows you to finance energy-efficient improvements into a single loan.
EEMs are available for a variety of loan types and can be used for both purchases and refinances. These environmentally friendly home loans can be a bit more complicated to close, but the effort can pay off in energy savings for years to come.
- Energy-efficient mortgages (EEMs) offer a way to buy or refinance a home and pay for energy-efficient home improvements with a single loan. This can offer significant monthly savings on your utility bills.
- Getting an EEM may offer tax benefits by allowing you to roll remodel costs into your mortgage, for which you may be able to take the home mortgage interest deduction.
- It may take a little extra work to get an energy-efficient mortgage. Challenges include researching cost savings of specific improvements, finding energy-efficient mortgage lenders, hiring a contractor and getting a home energy assessment.
How EEM programs work
Energy-efficient mortgage programs allow you to apply for a mortgage while also rolling the cost of energy-efficient upgrades right into your home loan.
This can simplify paperwork and allow you to get cost-effective upgrades done upfront, so you can begin saving on energy costs right away.
You’ll start by looking for energy-efficient mortgage lenders and deciding which upgrades you plan to make. You then choose a contractor and submit a renovation plan to your lender. The lender will help you schedule a home energy assessment from an energy rater or other qualified professional. This inspector will verify that the home is energy efficient or will be after improvements are made. They will also confirm that the upgrades will be cost-effective.
It’s important to verify upfront that your contractor’s timeline (including potential delays) fits the EEM mortgage program’s requirements. You will likely need to have the work completed between three and six months after closing in order to qualify for the EEM loan.
Types of energy-efficient mortgages
Here’s a closer look at how both conventional and government-backed energy-efficient mortgage programs work, and what you can finance with each one:
Conventional
Conventional loans offer the most flexible EEM terms. Both Fannie Mae and Freddie Mac, two entities formed by the U.S. government to make it easier to get mortgages, allow you to finance up to 15% of the home’s as-completed value to make energy-efficient home improvements using one loan.
That said, the minimum mortgage requirements are a bit more stringent for conventional loans. You may need at least a 620 credit score to qualify for a Fannie Mae mortgage and a 660 score for a Freddie Mac mortgage, though lenders may offer some flexibility.
What improvements can you finance with conventional EEMs?
Both the Fannie Mae HomeStyle Energy Mortgage and the Freddie Mac GreenCHOICE loan have lists of covered energy-efficient improvements, but here’s a selection both are likely to cover:
- Air sealing
- Adding energy-efficient appliances
- Improving insulation
- Installing efficient faucets, showerheads and toilets
- Replacing windows and doors
- Replacing heating and cooling systems and water heaters
- Switching to renewable energy, such as solar panels or wind power
FHA
Loans backed by the Federal Housing Administration (FHA) are popular among many buyers because they offer lenient down payment and credit score requirements. However, you typically need a 580 credit score and a 3.5% down payment (or a 500 credit score and a 10% down payment), and meet other criteria to qualify for an FHA home loan.
As far as the energy-efficient mortgage program is concerned, borrowers can increase their total loan amount by the cost of the improvements without having to qualify for the additional amount. Depending on how much the improvements cost, the FHA will either cover the costs upfront or give the lowest of either $4,000 or 5% of the property value. The work must be finished within 90 days after closing.
What improvements do FHA EEMs finance?
Examples of the types of energy-efficient home improvements that an FHA EEM can cover include:
- Replacing a heating and cooling system
- Fixing or replacing a chimney
- Insulating an attic, crawl space, pipes or air ducts
- Replacing doors and windows
- Installing solar technologies
VA
The VA’s version of an EEM offers an affordable way for eligible military members and surviving spouses to make energy-saving upgrades to their homes. To qualify, you’ll need to meet the requirements for a VA home loan.
Eligible borrowers can finance up to $6,000 of improvements, on top of their loan amount. However, the improvements must be completed within six months of closing on the loan.
What improvements do VA EEMs finance?
VA EEMs are typically used to finance the following types of energy-efficient home improvements:
- Solar heating and cooling systems
- Caulking and weather stripping
- Furnace efficiency modifications
- Adding new insulation
- Replacing windows and doors or heat pumps
How to qualify for an EEM
You’ll need to shop for a mortgage, keeping your energy-efficient home improvement goals in mind. Here are the steps you need to take in order to qualify for an energy-efficient mortgage:
- Choose a mortgage type: Start by deciding whether you prefer and are likely to qualify for a conventional, an FHA or a VA loan. Then, research and compare the energy-efficient mortgage programs available for that type of loan to see which are a good fit.
- Decide what kind of energy-efficient home you want: You may want to buy a property that is already energy efficient, such as an Energy Star-certified apartment or house, or make energy-saving upgrades to an existing home. In that case, you’ll need to decide which projects are most cost-effective. Not sure where to start? Check out this guide to energy-efficient improvements from the U.S. Department of Energy. Look at the upfront cost and the time to recoup your investment through energy savings.
- Find an EEM lender: Not all lenders offer EEMs, so you may need to do a little more research to find energy-efficient mortgage lenders. (See below.)
- Apply for a green mortgage: You’ll need to take all the steps in the traditional mortgage process. This includes mortgage preapproval, filling out an application and going house hunting.
- Make a plan for improvements: Finalize your list of improvements and find a contractor to do the work. Then submit a written plan for improvements to your lender.
- Get a home energy assessment and appraisal: Working with your lender, schedule a home energy assessment and appraisal from a qualified professional. This step proves to the lender that the home is energy-efficient or will be after renovations, and it gives the lender an as-completed value for the home.
- Close on the home and get to work: You’ll close on the home just as you would with a traditional mortgage. Then you’ll need to make sure that your contractor completes improvements within the required timeframe, usually three to six months, depending on the type of loan.
As you can see, an EEM requires a few extra steps during the mortgage approval process, but the cost savings and potential tax benefits may make it worth your time.
Get your free credit score with LendingTree Spring.
Finding energy-efficient mortgage lenders
If you think an energy-efficient mortgage may be right for you, you’ll need to find a mortgage lender that offers these loans. It’s a good idea to browse mortgage rates, research mortgage lenders and read reviews to see which ones get high marks for offering energy-efficient mortgages.
In addition to the standard questions you ask a mortgage lender, you’ll want to include questions specific to EEMs. Questions to ask potential mortgage lenders include:
- What types of energy-efficient mortgages do you offer?
- What are the requirements to qualify for these mortgages?
- What types of projects can be financed with these mortgages?
- What kind of home energy assessment is required, and how does it work?
- What are the requirements for a contractor, and is DIY work allowed?
- How long do I have to complete the work after closing?
To get you started, LendingTree provides reviews and ratings of a variety of mortgage lenders, including several that offer energy-efficient mortgages. Some of these energy-efficient mortgage lenders include: Guild Mortgage, New American Funding and Pennymac Mortgage.
Pros and cons of an energy-efficient mortgage
Pros
- It may be easier to get approved: When you apply for an EEM, lenders may offer more flexibility on factors such as loan-to-value (LTV) and debt-to-income (DTI) ratios. That may offer you a better chance of approval.
- Qualify for a more expensive home: Lenders will also take into account the monthly savings you reap from a more efficient home. This means you may be able to get approved for a higher mortgage amount, putting more homes within reach.
- Save money on monthly energy costs: You can only get an EEM when making improvements to or buying a property that’s already energy efficient, such as an Energy Star-certified home. This can allow you more financial flexibility and keep more money in your wallet.
- Take advantage of potential tax savings: If you finance energy-saving improvements into a mortgage, federal and state mortgage tax breaks may be yours to claim on your income taxes. Certain tax-deductible home improvements can also lower your tax bill.
Cons
- Must get an energy assessment from a qualified pro: To qualify for an EEM, you’ll need to take the extra step and have an energy rater or other qualified professional physically inspect the home you plan to buy or refinance. This helps to ensure that the improvements you plan to make are cost-effective, but it is yet another layer to the approval process.
- Lack of information can discourage borrowers: Details and guidance on EEMs are not as widely available to the public as information on some other types of mortgages. So getting one of these mortgages can require additional research and spending more time talking with lenders.
- Fewer options when it comes to lenders: There are multiple EEM programs available, but not all lenders offer them, and so your options are naturally limited. Nonetheless, the savings can still make it worthwhile.
- Limited time to make improvements: Lenders and EEM programs set limits on the amount of time you have to make improvements to the property. In some cases, you may have as little as three months to get the work done.
EEM alternatives
If an energy-efficient mortgage is not right for you, but you still want to make energy-saving improvements, you’ll have options ranging from government grants to home improvement loans. Here are a few ways you might finance your energy-efficient upgrades without an EEM:
- Government grants and assistance programs: Various government programs offer assistance or incentives for energy-saving improvements and weatherization for low-income homeowners. These include the U.S. Department of Energy Weatherization Assistance Program and the U.S. Department of Health and Human Services Low Income Home Energy Assistance Program.
- Property Assessed Clean Energy (PACE) loans: PACE loan programs allow homeowners to finance home improvements that increase energy efficiency. A PACE loan gets paid back over time through an amount added to your property taxes. Homeowners interested in a PACE loan will need to contact their city, county or other local government for information on available programs.
- On-bill loan programs: You may be able to get an energy-efficient home loan, then pay the funds back over time through your utility bill. These programs typically offer zero-interest loans and don’t use your home as collateral. Contact your utility company or local government to find out if such a program exists in your area.
- A home equity loan or line of credit: If you already have equity in your home, you can use a home equity loan or home equity line of credit (HELOC) to fund energy-efficient home improvements that will save you money over time. These loans require equity and good-to-excellent credit.
- A cash-out refinance: Another option for homeowners with existing equity is a cash-out refinance, where you’ll use the “cash out” to fund the improvements. These loans typically require 20% equity in your home and good-to-excellent credit to qualify.
- An eco loan or personal loan: Some lenders offer eco loans, which are home improvement loans with no equity requirement designed specifically to finance energy-efficient upgrades. Like other types of personal loans, these loans may charge higher interest rates than a HELOC or home equity loan.
- Other home improvement loans or mortgages: Other loan or mortgage options include the FHA Title I loan, which offers up to $7,500 to improve homes for low-to-moderate-income homeowners, and the FHA 203(k) loan, which allows you to buy or refinance and remodel a home with one loan.
Frequently asked questions
Yes, you need a home energy assessment by a qualified professional in order to get an energy-efficient mortgage. The inspector must make sure the home is energy-efficient or will be after improvements are made. They also estimate the monthly energy savings and the overall value of the energy-saving features.
The time you have to complete energy upgrades with an EEM depends on the type of loan you get. You typically have up to six months after closing to complete upgrades with an energy-efficient mortgage. However, upgrades must be done within 90 days if you have an FHA loan.
Yes, you can combine an energy-efficient mortgage with down payment assistance (DPA) programs. EEMs are available with conventional, FHA and VA loans, all of which allow down payment assistance from a state or local government or other program. You’ll always need to check with your lender for the specifics of your loan.
Depending on the type of energy-efficient mortgage, you may be able to use an EEM to install solar panels on a home. EEMs can be used for a wide range of energy-saving improvements, including solar equipment. Check with your lender for a written list of improvements allowed under your loan.
An EEM allows you to fold the cost of energy-saving home improvements into a mortgage. This allows you to take advantage of the mortgage interest deduction on income taxes for the home improvements you made.
View mortgage loan offers from up to 5 lenders in minutes