It IS Easy Being Green: VA Energy Efficient Mortgage
It’s not uncommon for homebuyers to want to make energy-efficient improvements to their new house. These improvements can create savings in the long run — however, they can also be costly. For members of the military, the VA energy efficient mortgage helps fund improvements that raise the energy efficiency of a home.
- What is a VA energy efficient mortgage?
- How the VA energy efficient mortgage works
- Who’s eligible for VA mortgages?
What is a VA energy efficient mortgage?
A VA loan is a loan extended to veterans and military service members as well as eligible surviving spouses. The purpose of these loans is to help those involved in the military become homeowners, and they can come in several forms.
One variation of the VA loan is a VA energy efficient mortgage. This is an add-on, rather than a standalone mortgage loan, that allows lenders to increase a mortgage by up to $6,000 specifically for making a home more energy efficient — that’s why this is sometimes referred to an energy improvement mortgage. Improvements of more than $6,000 must be approved by the VA. You can get the add-on with a VA loan used to purchase an existing home or a VA refinance loan.
How the VA energy efficient mortgage works
A VA energy efficient mortgage can be used to fund a wide range of home upgrades. If not completed before closing, improvements should be finished within six months of closing, and the lender may withhold the extra funds in an escrow or earmarked account, to be disbursed when the buyer makes the improvements.
The funds for energy efficiency improvements include both the costs of the upgrades themselves and the labor costs. However, if the installation is performed by the veteran, the loan will only include funds that pay for the materials.
Homeowners can apply for loans of different amounts, though the documentation requirements will change based on the amount. Loans up to $3,000 only require basic documentation of the costs, which can be provided using an itemized contract.
The loan can actually extend up to $6,000, as long as the increase in mortgage payments does not exceed the estimated savings from the upgrades. These estimates are made by the lender, who rely on information from organizations like utility companies and state agencies to make the estimate. Lenders also take into account the costs estimated on the itemized contract.
For loans of over $6,000, the VA itself will have to make a value determination of the upgrades to determine if the loan can be approved. A veteran’s income is taken into consideration as well, and a VA Certificate of Commitment has to be issued to approve the loan. The VA Certificate of Commitment is simply a notice from the VA that the loan has been approved.
What improvements can be made using a VA energy efficient mortgage?
The VA lender’s handbook includes a list of potentially qualified improvements, though you’re not limited to these projects:
- solar heating and cooling systems
- caulking and weather-stripping
- furnace efficiency modifications
- clock thermostats
- new or added insulation
- storm windows and doors
- heat pumps
- vapor barriers
This is not an exhaustive list of the improvements that can be made, and further details can be discussed with a lender.
Improvements to a home that do not help improve the energy efficiency of the home cannot be made using the energy efficient mortgage. Also, while air conditioners can be upgraded, they cannot be installed using this type of financing.
The pros of VA energy efficient mortgages
On its own, a VA loan offers several advantages to those who qualify, including low interest rates, no down payment requirement, no mortgage insurance and limited closing costs. The energy efficient mortgage add-on enhances an already valuable product.
- No down payment: A lack of a down payment requirement also positions a VA loan favorably when compared to another type of loan, the Federal Housing Administration (FHA) energy efficient mortgage, which requires a minimum down payment of 3.5%.
- No mortgage insurance: FHA-based energy efficient mortgages also require borrowers to pay a mortgage insurance premium. This is collected in monthly installments. A VA-guaranteed mortgage loan, however, has no such monthly insurance premiums. This helps to keep a VA mortgage loan costs down when compared against an FHA loan.
- No energy audits: In comparison to an energy efficient mortgage made with the FHA, the VA mortgage does not require an energy audit by a energy rater. For borrowers, this removes a step from the mortgage loan process, which can speed up the time to completion.
- Minimal documentation for small projects: Conveniently, an energy efficient mortgage add-on of up to $3,000 only requires that a homeowner document the work done to their home. Documentation can be provided in the form of itemized improvements or copies of the work bids placed on the home.
- Low-cost financing for energy improvements: If you want a more energy efficient home, this may be one of the most affordable ways to do it. The additional funds set aside for energy efficient improvements help offset the upfront costs that the buyer would otherwise have to assume to make the desired improvements. The improvements made to a home also create monthly savings for the borrowers. Money collected from those savings can be put toward paying the mortgage loan.
The cons of a VA energy efficient and improvement mortgages
There are a few cons to taking out an energy efficient mortgage, as well.
- A larger mortgage: The additional funds extended to a borrower come with increases in the monthly mortgage payments.
- Lending limits: Also, the VA has tiered limits on how large of a loan can be approved. Amounts under $6,000 can be approved through a combination of documented costs and savings estimates drawn from local agencies. For amounts over $6,000 though, a more comprehensive review is required that includes getting a VA Certificate of Commitment.
- Documentation: For any amount over $3,000, borrowers have to work with lenders to guarantee that the savings from home improvements are higher than the borrower’s increase in monthly mortgage payments. The lender has to inspect the itemized improvements and copies of bids to determine whether the savings from the improvements are greater than the increase in monthly mortgage payments.
- Funding fee: Veterans also have to pay a funding fee on VA mortgage loans. This fee is calculated from the full loan amount, which includes the cost of the energy efficient improvements. The funding fee equates to paying more upfront to fund a home’s improvements.
Applications for an energy improvement mortgage may be denied if the savings from the improvements do not exceed the increased cost of the mortgage. There are also limits to how the loan can be used: for example, air conditioning systems can be modified but not installed, and the loan also can’t be applied to general home improvements.
Who’s eligible for VA mortgages?
Energy efficient and energy improvement mortgages are considered add-ons to a traditional VA mortgage. They are made in conjunction with a VA loan for purchasing or refinancing a home, so they do not have specific criteria that must be met. Rather, eligibility is considered during an application for a general VA loan.
Three things are needed to be qualified for a VA loan. These include a satisfactory credit rating, sufficient income and a certificate of eligibility; there are also service requirements. You’ll need a certificate of eligibility (COE) to show lenders you qualify.
A VA energy efficient mortgage helps buyers make energy efficient improvements to a home they are buying while the VA energy improvement mortgage is designed for improving existing homes. There are numerous improvements that can be made using these loans, including improvements to cooling systems and thermostats.
The loan cannot be generally applied to all improvements and must be restricted to energy efficient upgrades. However, the mortgage has several advantages, such as no down payments and a need for minimal documentation on minor improvements. Veterans and their spouses are eligible for energy mortgage so long as they meet service requirements and demonstrate sufficient ability to pay back the loan.