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What is a VA Energy Efficient Mortgage (EEM)?

The Energy Efficient Mortgage program was established to provide homeowners with a convenient way to finance energy-efficient home improvements. Whether you want to reduce your carbon footprint or lower your utility bill each month, a VA Energy Efficient Mortgage (EEM) loan is a great option.

Let’s dive into how to obtain an Energy Efficient Mortgage through the VA and what acceptable EEM improvements look like.

How Does an EEM Work with a VA Loan?

With an EEM and VA loan combo, you can turn some of your desired home upgrades into a reality. It’s as easy as simply speaking to your lender to get the process started. Here is a quick overview of how an EEM works with a VA Loan:

  1. After you apply for a VA loan and receive a Notice of Value (NOV), the VA will give you details about EEMs. This is when you should talk to your lender if you are interested in energy-efficient improvements for your home.
  2. Your lender will then work with you to determine the cost of the EEM improvements and how much money you can receive through your VA home loan. Your lender will do the majority of the work to ensure your upgrades meet the VA's energy-efficiency guidelines.

Whether your home is newly constructed or already established, an EEM is possible. Keep in mind that there may be additional conditions you must meet if you've already made some improvements to a new build or even an older home.

Guidelines for Using a VA EEM

While there are some guidelines your lender will have to abide by before approving a VA EEM, there aren’t as many restrictions as it may seem. For starters, the amount you finance through an Energy Efficient Mortgage must be 5% or less than the property’s total value or the amount the VA has deemed reasonable for your energy-efficient improvements.

It’s important to note that the additional funds for EEM improvements cannot exceed $6,000 more than the original VA loan. An EEM can be used in conjunction with a VA purchase loan or a refinance loan, such as a VA Cash-Out refinance, to add energy efficiency improvements.

To help you determine how much you want to finance, there are three tiers of specifications for the costs of energy-efficient improvements. These tiers are sorted based on the estimated cost of the improvements. This way, depending on your budget and energy savings goals, you can decide which improvements to focus on.

Energy Efficient Improvement Tiers:

  • Tier 1: Improvements under $3,000. Typically you will need a copy of a contractor bid or quote explaining the costs as well as manufacturer information for each product.
  • Tier 2: Improvements between $3,000 and $6,000. Along with the information required in the first tier, you will need an energy audit showing at least a year of the home’s average utility costs.
  • Tier 3: Improvements over $6,000. Any improvements must be approved by your lender AND the VA. This makes it a little challenging to obtain an EEM for more than $6,000, but it’s still possible.

If you’re a professional DIYer, you might wonder whether you should hire a contractor or do the hard work yourself. If you choose to do the work yourself, it's essential to know that the cost of labor cannot be included in the loan amount.

However, if you hire a contractor to do the work, the cost of labor can be included in the loan limit. This is because the contractor's work is considered an improvement to the property and is eligible for financing. Be sure to let your lender know which route you want to take since it can affect your loan.

Energy Efficient Mortgage (EEM) Requirements

While your lender will certainly guide you through EEM requirements, it is good to familiarize yourself so you know what to expect throughout the process.

EEM VA Loan Checklist

  1. VA loan: Be eligible for a VA Loan, which will require an NOV of the property you wish to purchase.
  2. HERS: Obtain a home energy rating score (HERS), which should be conducted by a qualified professional. This score rates your home’s energy efficiency and is used to pinpoint where you can potentially save money on energy-efficient home improvements.
  3. Improvement guidelines: Work with your lender to identify the cost of the improvements that must be made and ensure your improvements meet the guidelines.
  4. Determine finance total: Your lender will help you figure out how much to finance for the EEM as an addition to your VA loan.
  5. Make improvements: Within 90 days of closing on your loan, you should have completed the agreed-upon energy-efficient improvements.

Once you’ve made your home improvements, your lender will reach out to the VA to determine the balance of escrow funds and how they will be disbursed. This process is in place to ensure the EEM portion of the loan is actually used toward energy-efficient home improvements.

Benefits of a VA Energy-Efficient Mortgage

In case you didn’t know, there are many benefits to making energy-efficient home improvements to your new build or existing home. You may even be surprised that these perks extend beyond saving more on your utilities. These include:

  • Seasonal comfort: Your HVAC system will be more equipped to handle the temperatures of the changing seasons, contributing to a more comfortable living space.
  • Reduced noise and condensation: New windows are more insulated and contribute to less noise from the outside as well as reduced condensation, which has been known to damage furniture and carpet.
  • Improved air quality: Many energy-efficient upgrades also contribute to fewer pollutants and allergens entering the home, which is bound to improve your overall health.
  • Eco-friendly: The main reason EEMs are available is to help reduce humankind’s carbon footprint and help the planet.
  • Improved resale value: More homebuyers are looking for homes with eco-friendly home improvements and are willing to pay more for a home that already has them.

Allowable EEM Improvements

When applying for an Energy Efficient Mortgage, you’ll need to ensure your desired changes fall under the list of “approved” improvements. Remember, the purpose of an EEM is to reduce utility bill costs and ensure that home changes are environmentally beneficial.

Here is a list of approved EEM improvements with a VA Loan:

  • Solar Panels
  • Attic Insulation
  • Wall Insulation
  • Weatherization
  • Floor Insulation
  • Lighting
  • Windows and Doors
  • HVAC systems
  • Water Heaters
  • Smart Thermostats

VA Energy-Efficient Mortgages provide a practical and affordable solution for homeowners. By incorporating the cost of energy-efficient improvements into the mortgage, borrowers can enjoy the benefits of a more environmentally friendly home while potentially saving money on energy expenses. Reach out to a VA lender today to talk about your possible EEM improvements.