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How the VA Energy-Efficient Mortgage Works
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Members of the military looking to fund home improvements that raise the energy efficiency of their home may want to consider a VA energy-efficient mortgage. Exclusively for borrowers eligible for loans backed by the U.S. Department of Veterans Affairs (VA), the VA energy-efficient mortgage may be an economical way to pay for upgrades and reduce utility bills.
What is a VA energy-efficient mortgage?
A VA energy-efficient mortgage, or EEM for short, is a small loan that can be added to a VA home purchase or refinance loan to cover the costs of making energy-efficient home improvements. VA EEMs aren’t standalone loans like a home equity loan or home equity line of credit (HELOC); they are just additional loan amounts added to regular VA loans.
The maximum loan is usually $6,000, but you may be approved for more if your home’s value increases by an amount equal to the cost of the upgrades. For example, if the energy improvements cost $10,000 and an appraisal confirms a value increase of $10,000, the full amount could be added to the EEM loan with VA approval.
How the VA energy-efficient mortgage works
An energy-efficient loan may be added to an approved VA loan to finance the costs of acceptable energy-efficiency improvements. Here’s how it works:
You must first be eligible for a VA loan. Standard requirements include:
- A certificate of eligibility showing enough VA loan entitlement for the loan amount
- A credit score of at least 620 (VA doesn’t require a minimum, but most lenders do)
- A debt-to-income (DTI) ratio of no more than 41% (measured by dividing your total monthly debt by your gross monthly income)
- At least 10% equity for a VA cash-out refinance, if applicable
Your home improvements must be VA-approved. You’ll find a list of VA-approved energy-efficient improvements in the next section.
Your home’s notice of value will provide information on EEMs. Part of the VA appraisal process includes a “Notice of Value,” which outlines the value of the home and includes a notice about energy-efficient mortgages. Essentially, you may want to consult a qualified home energy expert to make sure the improvements are worth the cost.
Your lender determines the maximum EEM loan amount. VA-approved lenders can increase the mortgage balance by:
- Up to $3,000 based on the verified costs of the improvements (with receipts, invoices, etc.)
- Up to $6,000 as long as the monthly payment isn’t higher than the estimated energy cost savings
- More than $6,000 with VA approval
Your home improvements need to be completed within six months. VA energy-efficient funds can only be used to pay for the costs of equipment and labor associated with the energy-saving upgrades, and lenders track the progress to make sure they’re finished in a timely manner.
What home improvements can you make with a VA EEM loan?
The VA EEM guidelines list acceptable energy-efficient improvements, that include but are not limited to:
- Solar heating systems
- Solar cooling systems
- Furnace efficiency modifications
- Clock thermostats
- New or added ceiling, attic, wall or floor insulation
- Water heater insulation
- Storm windows or doors
- Thermal windows or doors
- Heat pumps
- Vapor barriers
How to get a VA energy-efficient mortgage
Decide what you need it for. There are three ways you can use a VA EEM:
- To make an energy-efficient home even more efficient
- To buy a home and make energy-saving upgrades
- To refinance your current home and add in the cost of improvements
Get a HERS rating on your home. The Home Energy Rating System (HERS) Index is a nationally recognized system for testing your home’s energy performance. You can check for HERS raters in your area using the RESNET National Registry.
Shop around for lenders. Not all mortgage companies offer VA energy-efficient mortgages. You may need to shop for more than the usual three to five lenders to find the most competitive EEM interest rates and terms.
Make sure you qualify for a regular VA loan. Unless you’re refinancing with a VA IRRRL, the lender checks your earnings and credit history, and orders a VA appraisal to calculate your home’s value. Because you’ll have a larger loan amount with a VA EEM, you’ll need more income to qualify for the higher monthly payment.
Calculate your energy savings versus your payment increase. If your monthly utility bill won’t drop enough to cover the increase in your monthly mortgage payment, it’s not worth it to take out a VA EEM loan.
Pros and cons of a VA energy-efficient mortgage