Originating More Energy Efficient Mortgages In 2011

Under the FHA Energy Efficient Mortgage (EEM) Program, a borrower can finance into the mortgage 100 percent of the cost of eligible energy-efficient improvements, subject to certain dollar limitations. To be eligible for inclusion into the mortgage, the energy-efficient improvements must be cost-effective — i.e., the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. The cost of any improvement to the property that will increase the property's energy efficiency and that is determined to be cost-effective is eligible for financing into the mortgage.

The maximum amount of the portion of the EEM for energy is the lesser of 5% of:

• the value of the property, or
• 115% of the median area price of a single-family dwelling, or
• 150% of the conforming Freddie Mac limit (formula changed June 10, 2009-Mortgagee Letter 2009-8)

The FHA maximum loan limit for the area may be exceeded by the cost of the energy-efficient improvements. However, the entire mortgage cannot exceed 110 percent of the value of the property. The cost of the energy improvements and the estimate of the energy savings must be determined via a physical inspection of the property by a home energy rating system (HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or energy consultant can be included in the mortgage.

Insulation and infiltration with adequate R-values or infiltration barriers in the form of:

• Insulation in ceilings, roofs, or attic floors that are over conditioned spaces, exterior walls, under floors that cover unheated areas, around slabs, around heating and cooling ducts and pipes in areas that are not conditioned, around the sill area and hot water heaters.
• Caulking and weather-stripping around window and door areas and at the sill areas.
• Special fireplace devices or features, such as combustion-air and flue dampers, and a fire door.
• Sealing of the sole plate and penetrations of the exterior shell.
• Dampers for exhaust fans.

Windows

• Double or triple-paned
• Storm windows
• Storm or insulated doors

Heating and cooling — new efficient systems may include:

• A high-efficiency oil or gas furnace with an Annual Fuel Utilization Efficiency (AFUE) rating of 80% or higher
• A high-efficiency heat pump with a Seasonal Energy Efficiency Ratio (SEER) measure of 9.0 or greater
• A Heating Seasonal Performer Factor (HSPF) of 7.0 or greater
• A central air conditioner with a SEER rating of 9.0 or greater

Heating and cooling system modifications may include:

• A flame retention oil burner
• Vent dampers for oil and gas furnaces
• Pilotless ignition for gas furnaces
• A secondary condensing heat exchanger for gas and oil furnaces

An EEM can be used with both the Streamline and a Standard 203(k) loan. One interesting combination is to use the Streamline (k) with an EEM. If your repairs will exceed the $35,000 limitation, the energy-efficient improvements can be pulled out of the 203(k) calculation (use your energy audit to identify the energy improvements). Once the 203(k) repair escrow is calculated, the energy improvements can be added back onto the loan, exceeding the $35,000 threshold if needed.

In 2011, we must be more diligent than ever about exploring different products and means by which to get deals closed. An EEM with a 203(k) or a FHA 203(b) mortgage should be in everyone's financing playbook.