VA Energy Efficient Mortgage Pros and Cons
Using one VA loan instead of two separate loans or paying for the improvements with a credit card simplifies the financing process and saves you money and time. A VA EEM loan is an add-on to other VA home loan programs but the borrower is not required to re-apply for the loan when they add the cost of the upgrades to the base VA loan amount.
A VA EEM loan offers borrowers multiple advantages including financing energy efficiency improvements with one VA mortgage, a low interest rate, requiring no down payment or equity position as well as the ability to reduce your utility bills and increase your property value. Program considerations include additional conditions based on the amount of loan proceeds that are used for energy efficiency improvements, the upfront VA funding fee and a longer closing schedule.
We review the full list of pros and cons for the VA Energy Efficient Mortgage Program below. Borrowers should understand both the positives and negatives of a VA EEM loan to determine if it is the right green mortgage option for them.
VA EEM Loan Pros
Finance a Home Purchase or Refinance Plus Major Energy Efficiency Improvements with One Mortgage
A VA EEM loan enables you to finance the purchase of a home or refinance your mortgage and include the cost of significant energy efficiency improvements with one loan as opposed to paying for the improvements out of pocket or arranging a home loan plus a second mortgage, home equity loan, line of credit (HELOC) or PACE loan to finance the upgrades. Using a single VA home loan instead of two separate loans or paying out of pocket with a credit card streamlines the financing process and saves you money and time. The VA Energy Efficient Mortgage Program offers borrowers an efficient and more cost-effective solution to financing energy efficient improvements when they buy or refinance a home.
Low VA Mortgage Rate
VA mortgage rates are typically 0.250% - 0.500% lower than the interest rate on a regular mortgage and are among the lowest of all mortgages. The interest rate for a VA home loan is lower for several reasons. First, the federal government guarantees 25% of the loan amount, which protects lenders against losses in the event that borrowers default on their mortgage. Second, military personnel tend to be more financially responsible and credit-worthy which also enables lenders to offer lower rates on VA mortgages. The lower interest rate on a VA home loan reduces your monthly payment and possibly saves you thousands of dollars in interest expense over the life of your mortgage. The lower rate is particularly beneficial to borrowers with lower credit scores, who usually pay a higher interest rate on their mortgage. A VA EEM loan enables borrowers to take advantage of lower VA mortgage rates to finance the cost of energy efficiency home improvements as opposed to paying a higher interest rate on a separate loan or credit card.
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No Down Payment / 100% Loan-to-Value (LTV) Ratio
The VA Energy Efficient Mortgage Program does not require borrowers to make a down payment or the case of a refinance, borrowers are permitted to have a loan-to-value (LTV) ratio of 100.0%. Not requiring a down payment or equity position compares to the 10% - 20% down payment or home equity position required by standard mortgage or home improvement loan programs and is lower than the 3.5% down payment required by the FHA Energy Efficient Mortgage Program. Requiring no down payment when buying a home or equity position when refinancing makes a VA EEM loan the ideal home financing option for eligible borrowers who struggle to save money to buy a home or who have no equity in their home.
Borrower Not Required to Re-Apply for Mortgage to Add Improvements to Loan Amount
With a VA EEM loan borrowers are not required to re-apply when they add the cost of energy efficient upgrades to their base VA loan. Additionally, borrowers are not required to make a larger down payment when using the VA Energy Efficient Mortgage Program to buy a home. For example, if a borrower is approved for a $200,000 VA loan to buy a $200,000 home, the borrower can add $6,000 in energy efficiency upgrades to the mortgage for a total loan amount of $206,000 without having to re-apply for the loan or obtain a special appraisal. The borrower is not required to re-apply for the new, higher mortgage amount because the energy efficiency improvements reduce your monthly utility costs which improves your ability to make your mortgage payment.
Lower Utility Bills and Increase Property Value
Paying for energy efficiency home improvements with a VA EEM loan provides multiple benefits to home owners including lowering your utility bills and increasing your home value. For example, using a VA EEM loan to install new windows or insulation lowers your monthly energy expenses and also increases the value of your home. Even small energy efficiency improvements such as adding new thermostats or replacing caulking can save you money on your utility bills and raise your property value.
Add-On to Other VA Loan Programs
A VA EEM loan is an "add-on" that is combined with another VA program such as the VA Home Loan or VA Streamline Refinance (IRRRL) programs. The standard VA Home Loan Program enables eligible borrowers to buy a home with no payment. The VA Streamline Refinance Program enables borrowers to refinance their existing VA mortgage with no appraisal report or credit check. Borrowers do not need to receive special eligibility to combine a VA EEM loan with the VA Home Loan or VA Streamline Refinance programs. If you are eligible for a VA mortgage you are eligible for a VA EEM loan.
No Loan Limits
As of January 1, 2020, the VA program does not apply loan limits to borrowers with their full VA entitlement available. This means you can use a VA EEM loan to purchase any price home and finance energy efficiency upgrades without making a down payment. This flexible guideline also enables you to qualify for a jumbo VA loan.
VA EEM Loan Cons
Restrictions on How Much You Can Spend on Energy Efficiency Improvement Project
The VA Energy Efficient Mortgage Program applies different conditions based on the amount of loan proceeds that are used for energy efficiency improvements. For energy efficiency upgrades up to $3,000, borrowers can add the cost of the improvements to their loan amount simply by providing bids or contracts that document the work. For energy efficiency improvements from $3,000 to $6,000, lenders are also required to work with borrowers to certify that the monthly savings from lower utility costs due to the energy efficiency improvements is greater than the increase in the borrower's mortgage payment from the higher mortgage amount. For energy efficiency projects that exceed $6,000, the post-improvement appraised value of the property must increase by more than the value of the improvements. For example, if you wan to finance $20,000 in energy efficiency upgrades on a home with a pre-improvement value of $200,000 then the post-improvement appraised property value must be at least $220,000. Additionally, lenders are required to determine that the monthly costs savings from the energy efficiency upgrades exceeds the increase in mortgage payment due to the higher loan amount and that the borrower can afford the higher monthly mortgage payment. Borrowers should work closely with their lender to determine what VA EEM Program conditions apply based on the cost of their energy efficiency improvements.
Upfront VA Funding Fee
The VA home loan program requires that borrowers pay a one-time, up-front VA funding fee, which is calculated as a percentage of the loan amount and may be added to the loan or paid out-of-pocket. The amount of VA funding fee depends on your down payment, loan program and if this is your first time using the VA program. For home purchase and construction loans, if you are using us the VA program for the first time, the funding fee ranges from 2.15% of the loan amount if you make a down payment of 0% - 4.99% to 1.25% of the loan amount if you make a down payment of 10% or more. For subsequent uses of the program, the funding fee ranges from 1.25% to 3.30% of the loan amount, depending on your down payment. The funding fee for a VA streamline refinance is 0.5% of the loan amount, regardless of how much times you have used the VA program or how much equity you have in your property.
Extra Closing Costs and Longer Mortgage Process
Borrowers are required to work with lenders to develop a detailed plan that outlines the energy efficiency improvements they want to make to a home. VA EEM Program applicants usually order an energy audit that is provided to lenders and serves as the energy efficiency improvement plan. The energy audit is performed by a qualified firm or professional and identifies ways to improve a property's energy efficiency as well as the anticipated cost and estimated monthly savings associated with the improvements. Obtaining the energy audit adds time and cost to the mortgage process although some firms provide discounted or free audits for veterans. To ensure a smooth mortgage process, borrowers should make sure that they hire a certified energy auditor. Additionally, due to the extra work required to process a VA EEM loan, most lenders charge higher fees. Borrowers should fully understand any extra lender or third party closing costs before selecting a VA EEM lender.
More FREEandCLEAR Resources
VA Energy Efficient Mortgage (EEM) Program Overview
Review our comprehensive overview of the VA Energy Efficient Mortgage (EEM) Program including borrower qualification requirements and other important program information such as property eligibility and energy efficiency improvement project guidelines.
VA Mortgage Rates
VA EEM loans are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions. Use our VA mortgage rate table to find lenders that offer the VA Energy Efficient Mortgage (EEM) Program and to review updated VA mortgage rates and fees for lenders in your area. Comparing rates from multiple lenders is the best way to save money on your mortgage.
VA Home Loan Calculator
Use our VA Home Loan Calculator to determine how much home you can afford with a VA loan. The calculator also determines the upfront VA funding fee based on your loan amount, down payment and how many times you have used the program.
Summary of Energy Efficient Mortgage (EEM) and Green Mortgage Programs
Review and compare important program features and eligibility requirements for multiple energy efficient mortgage (EEM) and green mortgage programs so that you can select the mortgage option that is right for you.
Sources
"Chapter 7.3. 3. Energy Efficient Mortgages (EEMs) ." Lenders Handbook - VA Pamphlet 26-7. U.S. Department of Veterans Affairs, 2020. Web.