VA Pamphlet 26-7: [3.17] Energy Efficiency Mortgages (EEMs)
a. Energy Efficient Mortgages refer to loans for the acquisition of an existing dwelling and the cost of making energy efficiency improvements to the dwelling[, or refinancing an existing VA loan with an IRRRL,] or for energy efficiency improvements to a dwelling owned and occupied by a veteran. A veteran who purchases an existing home will be informed of the opportunity to include energy conservation improvements in the financing. The CRV, VA Form 26-1843, Certificate of Reasonable Value, issued for any existing property (ch. 9, par. 9.01a) includes the following notice to the veteran:
“The buyer may wish to contact a qualified person/firm for a home energy audit to identify needed energy efficiency improvements to the property. In some localities, the utility company may perform this service. The mortgage amount may be increased as a result of making energy efficiency improvements such as: Solar or conventional heating/cooling systems, water heaters, insulation, weather-stripping/caulking, and storm windows/doors. Other energy related improvements may also be considered. The mortgage may be increased by:
- up to $3,000 based solely on the documented costs; or
- up to $6,000 provided the increase in monthly mortgage payment does not exceed the likely reduction in monthly utility costs; or,
- more than $6,000 subject to a value determination by VA.”
b. A loan for existing property may be increased by up to $6,000 at the option of the lender and veteran at any time up to loan closing without VA’s prior approval (see subpar. d below). If the labor is to be performed by the veteran, the loan increase will be limited to the amount necessary to pay for materials. For energy efficiency improvements that will increase a loan amount by more than $6,000, the amount of the increase must be supported by an increased valuation in an equal amount.
c. Information about the increased loan amount to cover improvements need be shown only when reporting a closed loan. The loan increase must be supported by a copy of the bid(s) or contract itemizing the improvements and their cost and must be included with the VA Form 26-1820, Report and Certification of Loan Disbursement.
Evidence of guaranty is based on the higher loan amount even if a certificate of commitment was issued for a lesser amount. Additional funds for improvement purposes are considered part of the total loan which must be secured by a first lien.
d. Underwriting Energy Efficient Mortgages
- For underwriting purposes, the increase in loan payments resulting from the higher loan amount to cover the cost of energy conserving improvements up to $3,000 will normally be offset by a reduction in utility costs.
- In determining that the increase in monthly mortgage payments for additions of more than $3,000 up to $6,000 does not exceed the likely reduction in monthly utility costs, lenders are expected to rely on locally available information provided by utility companies, municipalities, State agencies, or other reliable sources to make the determination. VA will accept the lender’s determination that the requirement is met.
- Any increase in monthly mortgage payment for loan amount increases over $6,000 due to energy efficiency improvements must be considered in the loan analysis. As in (1) and (2) above, increases up to $6,000 may be offset by the likely reduction in utility costs. A sizeable increase over $6,000 should be carefully reviewed to assure that the veteran’s income is sufficient to cover the higher payment. Lenders should exercise discretion in this matter. A VA certificate of commitment issued prior to a sizeable increase must be returned to VA for a determination that the applicant still qualifies for the loan.
- When adding the cost of energy efficient improvements to an IRRRL, if the monthly payment (PITI) for the new loan exceeds the PITI of the loan being refinanced by 20 percent or more, the lender must certify to having determined that the veteran qualified for the higher payment.]
e. VA will guarantee an energy efficient mortgage in the same proportion as a loan not including energy efficiency improvements. However, the charge to the veteran’s entitlement will be based upon the loan amount before adding the cost of energy efficiency improvements.
- Example: If a veteran has full entitlement and applies for a loan of $80,000, plus $6,000 in energy efficiency improvements, VA will guarantee 40 percent of the full loan amount of $86,000. Thus, the dollar amount of the guaranty will be $34,400, even though the charge to the veteran’s entitlement is only $32,000.
- Example: If a veteran with full entitlement applies for a loan of $144,000 to purchase a home, and adds $6,000 in energy efficiency improvements, the 25 percent guaranty on the loan will only require the use of $36,000 entitlement, but the dollar amount of the guaranty will be $37,500.
NOTE: THE FUNDING FEE MUST BE CALCULATED ON THE FULL LOAN AMOUNT,
INCLUDING THE COST OF THE ENERGY EFFICIENCY IMPROVEMENTS.
f. Energy efficiency improvements completed when the loan is reported to VA should be certified on VA Form 26-1820. However, if circumstances preclude completion of the energy conserving improvements prior to submitting the loan report, the loan may be closed by establishing an escrow to assure completion. VA will issue evidence of guaranty upon receipt of VA Form 26-1820 indicating that funds for completion of the energy conserving improvements are being held by the lender in an escrow or earmarked account. A formal escrow will not be required for loans involving energy conserving improvements processed on either a prior approval or automatic basis. Only the amount necessary to complete the improvements need be withheld, and no additional documentation concerning the escrowed/earmarked funds need be submitted when reporting the closed loan. However, the lender must provide written notification to the VA office of jurisdiction when improvements are completed and the escrow funds are disbursed. A lender should assure that costs of improvements have been paid.
g. If, after a reasonable period, a lender determines that the improvements will not be completed, the balance of the escrowed/earmarked funds will be applied as principal to reduce the loan balance, and the VA office of jurisdiction notified. In general, the improvements should be completed within 6 months from the date of loan closing, and VA will expect to receive either the lender’s notification to that effect or that the funds were applied to reduce the loan balance.
h. The lender is responsible for determining that weatherization and/or energy conservation improvements are reasonable for a particular property. The types of improvements may include installation of one or more of the following:
- Solar heating systems, including solar systems for heating water for domestic use;
- Solar heating and cooling systems;
- Caulking and weather-stripping;
- Furnace efficiency modifications limited to replacement burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights;
- Clock thermostats;
- New or additional ceiling, attic, wall and floor insulation;
- Water heater insulation;
- Storm windows and/or doors, including thermal windows and/or doors;
- Heat pumps; and
- Vapor barriers.
i. Lenders may determine that improvements other than those listed above are energy efficiency improvements. Additional improvements, such as room additions, made in conjunction with energy efficiency improvements require VA’s prior approval concerning the veteran’s income and credit except for a loan to be closed under the automatic procedure by an authorized lender.