EEM 101

There is so little understanding about what an Energy Efficient Mortgage (EEM) is, how to get one, how to do one and who/how you can benefit from one, that it's not even funny.  First off though, let's get the basic description of what it is and some nomenclature and a few misconceptions out of the way.  Since Energy Efficiency Management, Inc. specializes in this process and has much experience with the EEM, we feel it's important to help as many people as possible, understand this tremendously valuable and widely available program.

An Energy Efficient Mortgage (EEM) is a Federal Housing Administration (FHA) or Veterans Administration (VA) program that insures a mortgage loan, which allows the borrower to add "cost effective" energy efficient improvements to their (home) loan, and that recognizes the energy efficiency of a home.  The main idea here, is that the money you (the borrower) save from energy efficiency improvements on your energy bills, after adding the improvements cost to your principal, will be greater than the amount of money the borrower will spend each month to cover the cost of the added energy improvements over the installed improvements useful life.  So, the idea is that from day one in your newly purchased (or refinanced) home, you get a more energy efficient home, that is more comfortable with better indoor air quality and has more added value, but at the same time your overall true monthly expense to live in the home is cheaper, than if you didn't have the improvements; that's a good thing.

In the Real Estate and Lending profession, we say that your cost of home ownership is based on principle, interest, taxes and insurance (PITI), but is it?  What we know in the Green Real Estate field is that the true cost of homeownership also involves your monthly energy bills; so, the true cost of homeownership includes energy (PITI+E)! And when you consider that you could live in a home cheaper from day one, and that the home would have better indoor air quality, be more comfortable and  more valuable than if you didn’t do this green energy efficiency work to the home, why wouldn’t you take advantage of that…sign me up!  That’s the benefit of having an EEM, because if you’re not saving money, it isn’t an EEM.

An EEM (from-here-on-out) is not pronounced eeem, it's an EEM (three letters pronounced independently).  The term EEM is used interchangeably by Housing and Urban Development (HUD) and FHA to refer to the insuring of a new home loan (mortgage), or an existing home loan under this program.  Many people often refer to HUD's insuring of an existing home under this program as an Energy Improvement Mortgage (EIM); stop doing that, you are only confusing people with antiquated terminology.  Even the Energy Star web site (and this web site is wonderful and almost always "spot-on" for information), uses this term (or at least they used to, I hoped they’ve stopped), but they need to do some homework, because it is an EEM. If you don't believe me, pick up the phone and call HUD to see for yourself. So, now that we have that out of the way, let’s talk about some common misconceptions about the EEM:

It is expensive;  No it is not.  An EEM will add principal to your mortgage loan amount, this is true, but remember the concept here is that, the overall money you save in energy will be greater than the money you spend on installed cost of the improvements, that's why FHA will insure the loan (and at a same rate with no further qualifications).  So, no, the EEM should not be considered expensive. If anything, it should help to add tremendous value to your new (or existing) home purchase or refinance and lower your true cost of homeownership.

I might not qualify;  You do qualify.  If you qualify for an FHA loan (203b), then you automatically qualify and are thus eligible to apply for an EEM.  There is no further income documentation or concern about debt-to-income-ratio, because you should be saving money on your monthly living expense in your new home by having an EEM.

It will delay my closing; No it will not.  It is a simple process that should not slow down your closing of any real estate or loan transaction.  Some people that are not familiar with the process, or don't understand how easy it is, will make this kind of comment. The seller, lender and real estate professionals will all be paid on time and at the usual close of escrow. There will be a separate "hold-back period and portion established to handle the installation of improvements within a timely manner (often up to 90 days best installed by qualified contractors) after the usual close of escrow.

My Bank does not offer it; Yes they do, if they offer FHA products. The lender may not realize it, because they may have never done one recently.  And you will know they offer it, when they pass the EEM disclosure document in front of you at the time of closing. S o, if they don't offer it and you think you may want it; ask for it.

My Real Estate Professional didn't tell me about it; Not surprising. Most Real Estate Professionals (agents and mortgage brokers) don't know that much about it, because it has been underutilized for many years, especially during the last fifteen years and before when energy efficiency and environmental concerns were just not a priority.  But now HUD (in charge of FHA), has pledged to start promoting the program, presumably for the good of its customers, for the good of the environment and for the good of the nation. So, ask your real estate professional, and if they're not familiar with it, have them call us, we’ll fill them in on it. Also, you might consider working with an agent that holds the NAR Green Designation or one that is a Certified Green Real estate Professional® (CG-REP®); they should know about the program.

An EEM is for new homes; It's not just for newly constructed homes.  An EEM can be used to purchase a newly built home with already added energy efficiency improvement features, yes. The reality is though, that since there are far fewer new built homes these days, the vast majority of EEM's lately are being used as a program for the purchase or sometimes a refinance of an existing single family home (condo's and 1-4 multi-family units are okay too), or a refinance of an existing home.

It's not easy to find people who do EEM's;  You've already found someone. It's one of the things we specialize in.  We do the energy rating and report required to generate the EEM. This is called a HERS Report (generated by a HERS Rater conducting a HERS Rating), and HERS stands for Home Energy Rating System.  In California we call the HERS Report a Whole House HERS Rating and Report.  This is also known as an Energy Audit and Report required by FHA to generate the EEM process.  In the EEM process this Report is also known as a “Draft Report”.  It is used to determine which energy improvements will be "cost effective”, for you to add onto your first loan amount, which will provide you with greater savings in your energy bills now and over time verses the installed costs.  Once this is determined by the energy audit and subsequent report, you (the borrower) choses which energy improvements you'd like to add.

Once you chose the improvements you’d like to make, then you need to find a contractor to do the work.  You can even do the work yourself, but you can’t charge a rate for labor (that’s called sweat equity). But our advice it to let a qualified licensed contractor do the work. Try to find a certified green contractor or an Energy Upgrade California participating contractor.  They understand energy efficiency and how the “house as a system” concept or the “Whole House” approach works, and some of them know how that works with green products and system installs too.  Either way, you will have confidence that you will be working with well-trained folks, who understand the benefits of energy efficiency and how to install it.  Guess what; you may even be able to incorporate statewide rebates that only they can help you with. You can get more info on this by searching on the Energy Upgrade California web site.  You’ll even find our Approved Energy Upgrade California Contracting Division there to; Energy Efficiency Management, Inc. The website link is; www.energyupgradecalifornia.org.

So, we’re talking energy efficiency here right?  I mean this is an EEM, but It’s also interesting to note, for the green minded of you out there, that after you have done most of these energy efficiency improvements (which is the cornerstone of green, so-to-speak), you are very close to qualifying for a credible green label for your home.  That’s significant because you may be adding tremendous value to your home by doing so.  We know from the now famous, UCLA-UC Berkeley study that a green label on your home can increase the value of your home when you go to sell it, by as much as 9%.  And we have been duplicating those results in the field with the green labeled homes we sell; it’s one of the things we (American Green Home real Estate) specialize in, that no one else to date (at the time of this article) is doing; at least no one that we know of!

Sorry for the green detour…now back to the EEM.  After you have chosen a contractor, and you should always do your normal due-diligence, when choosing anyone to work on your home, then you will need to get bids for the work you have decided to do to your home, selected from the HERS EEM Report items; that is known as an energy package (it could include one item off the HERS Report or all of them).  Either way, you choose what you’d like to do and who you’d like to have do that work.  You’re borrowing the money here, so you get to make the call!

After that decision has been made regarding the energy package and who’s going to install it, then the HERS Rater will need to get the bids from the contractor you’ve chosen and make sure the scope of work matches the HERS Report.  Then the HERS Rater will finalize your EEM HERS Report and send it to you, and your lender (This is known as the “Final EEM Report”).  Then the lending Underwriting team has it and uses it to help generate you loan docs. 

Once you have signed you loan docs, closed Escrow and have recorded your purchase; then the EEM work can begin.  Usually a “hold-back” Escrow account is set up and that’s where the EEM funds go that will used to pay the contractor after they do the work and HERS Rater after they do the final inspection to close out the EEM.

So, once your “deal” has recorded, that’s the time to call the contractor to “get-to-work”.  So, you see, by that time everyone (like the Realtor®) who is expecting their commission for their hard work they have done for you, has been paid, it should not have slowed down the deal, one bit!

Once the contractor has completed their work and your energy package has been installed, you call out the HERS Rater and they conduct the final inspection that the work has been done, have you sign a demand to have Escrow pay the contractor for their part, sign the “Notice of Completion” (which they send to the bank to finalize the EEM process), then the EEM is complete and you begin saving money on your utility bill and living in a much more comfortable home!

Oh, and I forgot to mention: That’s also the time everybody stands around, looks at each other, shrugs their shoulders and say something like; wow, that was easy, we should do some more of those for clients…who knew?  We did!

If you have questions for now, you may find additional useful information on the HUD web site about EEM's at www.HUD.gov, or don't hesitate to contact us at john@energyefficiencypro.com or john@TheAmericanGreenHome.com