Home Loan Articles

One of the newest mortgage products available these days is called an EEM or Energy Efficient Mortgage. Energy Efficient Mortgages are mortgages which are designed to encourage people to buy new energy-efficient homes or to buy homes that have energy-efficient improvements by crediting for the energy saving measures in the home. In other words, an EEM will allow a buyer to qualify for a higher mortgage amount than he or she might normally be able to afford.

An EEM (Energy Efficient Mortgage) can help you save money and buy a better home.

The whole idea behind an EEM is to promote the purchase of energy efficient new homes and to help people afford buying older homes with energy efficient improvements. Obviously, the more energy efficient homes that are sold the less energy will be used. Energy Efficient Mortgages can be used for most common “green” home improvements such as upgrading heating and cooling systems, installing solar panels, increasing insulation and replacing old windows and doors with more energy efficient options.

Advantages of an EEM

Both home buyers and home sellers ultimately gain something due to this new type of mortgage. Home buyers get a larger, more comfortable and more energy-efficient home than they might otherwise qualify for. Their home will continue to save them money over in reduced energy bills over the years of ownership and when it is time to sell the home there will likely be more equity built up in it than in a less energy-efficient home. Saving energy and money on utilities is not a trend that is likely to change anytime soon. Home sellers will find that it will also be easier to sell their home and may set their home apart from the high inventory of houses that are for sale right now.

How To Get an Energy Efficient Mortgage

Energy efficient mortgages are available through private or government mortgage companies and there are various ways a home can quality. The home will usually have to be inspected for energy efficiency or be build as an ENERGY STAR qualified home. The rating will provide you with an Energy Savings Value which should tell you approximately how much energy, and therefore money, your home can save. The higher the home’s Energy Savings Value, the more money a homeowner is allowed to borrow. This rating systems is called a HERS report.

HERS (Home Energy Rating System)

The purpose of a HERS report is to quantify the amount of energy your home is able to save due to the upgrades or additions it has. The HERS report will tell you approximately how much money you’ll save in energy costs per year and over the lifetime of ownership for the home. This report will be used by the bank or mortgage company to help determine how much more money you can borrow as part of your home loan.

Some upgrades an energy efficient home may have:

• Increased insulation in attics, crawl spaces or walls.
• Energy efficient windows and doors.
• High efficiency heating or cooling system.
• Solar panels or other forms of alternative energy generation.

How an Energy Efficient Mortgage Works

Yes, this seems a little confusing at first. Let’s say you qualify for a $200,000 mortgage, but you find a great energy efficient home for sale for $240,000. If the home has a high enough Energy Savings Value or is ENERGY STAR rated then the bank may be able to extend you the extra $40,000 credit needed for you to purchase the home. The savings you experienced every month would be so great that the bank could essentially consider them to be part of your income. By increasing your income on paper the lender is allowed to give you more money because your income to expense ratio would be increased. It would still be a single home loan and a single mortgage, but the amount would be higher than you would normally qualify for.

Banks that sell their home loans and mortgages to Fannie Mae or Freddie Mac are usually the ones who offer Energy Efficient Mortgages because they are quasi-governmental agencies who are tasked with increase home ownership and, at the same time, being asked to help to reduce our country’s energy usage. They can usually be 15-year fixed or 30-year fixed mortgages. That’s how a conventional Energy Efficient Mortgage works, but there are also other varieties such as the FHA Energy Efficient Mortgage and the VA Energy Efficient Mortgage.

FHA Energy Efficient Mortgage

Similar to other EEMs, this Energy Efficient Mortgage is backed by the Federal Housing Administration (FHA) and has some additional rules and regulations that must be followed. An FHA Energy Efficient Mortgage’s loan amount can be affected by the various home improvements planned for a home. There are some rules for how much money can be allotted as part of the FHA EEM and that value can be based on the value of the property, 115% of the median area price for a single home or 150% of the Freddie Mac limit. You’ll want to talk to your mortgage lender for more details.

VA Energy Efficient Mortgage

There is also a VA EEM which can be applied for by military personnel, reservists and veterans. The loan is used for energy home improvements and ranges from $3,000 to $6,000. The Department of Veteran’s Affairs can offer more information if you’re qualified.

Energy Efficient Tax Credit

While an energy efficient home can save you lots of money in your year end taxes, you won’t get those tax savings directly from an EEM. Instead, you’ll want to consider trying to get tax credits and tax deductions from energy efficient home improvements that you’ve done over the years. That being said, an EEM is just like a regular mortgage where the interest you pay on the mortgage will generally serve as a deduction on your federal income taxes.

To find out if you or the home you’re looking to buy qualifies for an Energy Efficient Mortgage then you’ll want to speak to your housing lender or mortgage company. Most homes that are sold or qualify under as being energy efficient under this program will be advertised as being ENERGY STAR qualified or at least eligible for EEM credit.

We all know that for the past several years the housing market, and likewise the home loan lending market, has taken a substantial hit. Home values have been dropping for years, banks have severely tightened their mortgage approval requirements and the one thing that could really help the housing market – in increase in jobs – has yet to fully materialize. While many home sellers and homeowners have been walking away from their homes, taking part in short sales and generally being very pessimistic about their future, there are some people who are able to take advantage of the generally bleak economic housing environment and actually take advantage of it.

To really be able to take advantage of the housing crisis you have to be on the “other side of the table” from those who are suffering the most. Right now it’s definitely a “buyer’s market” which means that home buyers have the upper hand when it comes to negotiations because there are so many homes available and prices are still low. That means that home sellers won’t get as much money as they hope, but home buyers can often grab up a good deal.

So how can you take advantage of this situation? If you meet some basic criteria then you might be in the perfect position to come out ahead in this market.

First Time Home Buyers: If you are currently renting an apartment or home or living with your parents or have some other residential situation where you don’t have have a place of your own then this could be your time to jump. House prices are low, mortgage rates are low, but credit is still a little tight. That means that banks aren’t quite as willing to lend money to just anyone who walks in off the street. It does NOT mean that it’s impossible to get a mortgage. If you have good credit and a stable job then you can probably buy a house for 20% – $40% less than you might have paid for the same house three years ago. If you really want to get a good deal you could be brave and go for a short sale in which you end up trying to buy a home that’s been foreclosed on. In those sorts of sales you’re actually offering a price that must be accepted not necessarily by the current owner, but by the bank who now owns the home.

Become a Real Estate Investor or Landlord: Despite what you hear on the news, not everyone is 24 and unemployed or unable to find a job and not everyone is 40 years old with a family and no way to pay the mortgage. Lots of people, young and old, are doing okay in this country and life is about normal or just a little less stable. If you have some extra money from savings, real estate, or even other retirement investments then now might be the perfect time to put some of that money to work in real estate investments. Several years ago people would do this by “flipping houses.” They would buy a home, fix it up and then double or triple their money in just a year or two by selling it again. While you can probably still do this in some markets, it’s not going to have the guaranteed price jump or profit margins it once did. However, the one thing this entire housing crash has created is a need for more rental apartments and homes. Home loan rates are lower than they’ve been in years so if you’ve always wanted to give renting or being a landlord a try, now’s the time! You have lots of people looking for places to rent (instead of buying) and you have mortgage rates that are in your favor.

Start Your Own Home Improvement Business: This might be a surprising area of growth and you have to be pretty handy for something like this, or at least know some handy people you could hire. It stands to reason this way: many homeowners that would have moved or upgraded homes in a normal housing market at staying in their current homes now. That means that as the market recovers and equity slowly begins to rise again many people will want to begin adding on to their homes or at least upgrading what they have. Many down markets experience what is called “poverty fatigue” in which people get tired of living on a budget and saving money all the time and sometimes cut loose and want to spend their money on something they want. All those homeowners who are unable to sell their homes or haven’t moved, yet still have plenty of money, are going to need someone to do this for them. In my own neighborhood I know two different construction workers who were laid off from their jobs. In just six months they’ve both been able to build up small handyman and home repair business right from their home. One neighbor actually run his whole office out of his truck, while another converted a closet in his basement into a small office. Both are fairly busy all the time.

These are just some of the ways you can take advantage of the housing crisis. There are, of course, whole job industries that have actually experienced growth such as foreclosure companies, professional movers and even landscapers (banks pay them to maintain foreclosed properties). Not everyone can has the resources or abilities to do well in a housing market that plummeted the way this one has, but it’s good to look at both sides of the coin and see the possibilities and opportunities that arise in any economic situation.

It’s looking as though this year is on track to top last year for the number of likely foreclosures that are going to occur in the United States. While this is not very good news for the people whose mortage is now months past due, this can be a potentially opportunity for first-time home buyers and people who are looking for housing deals in their particular market.

Since 2009 unsold home inventory, including foreclosed upon properties has been rising. That means that banks now own more and more empty homes on their books. Banks don’t like owning unoccupied houses because that means they aren’t making any money from mortgage or renters and they aren’t making any money from selling the property.

Basic economics dictates that as the supply of homes goes up and the demand for homes remains low or goes down (a high jobless rate means many people don’t have the income to buy a house) then the prices of homes will probably continue to drop in many areas. Up to this point many banks have been reluctant to sell their homes for drastic reductions because there is the overall feeling that housing values will eventually bounce back. But some banks are being pushed to the breaking point where they can no longer afford to simply hold on to a glut of empty houses for much longer.

Remember that whenever you buy a foreclosed home you’re really buying the house from the bank and they need to approve the amount of money you offer. A foreclosure is a previous home loan that’s gone bad, so banks have been much more cautious about loaning out money in recent years. That makes it harder for them to lend out money, but a lack of loans means that more people haven’t been able to buy houses from them. It’s a vicious cycle that we’re only starting to come out of.

There are disadvantages to buying foreclosed homes and it pays to do your homework before jumping into a sale. Since banks are in the business of loaning out money (and not owning homes) you can sometimes work out deals with banks.

Using The Foreclosing Bank As A Lender: Some banks will be more willing to work with you, and may even reduce the price of a property, if you’re willing to apply for a mortgage through them. In a case like that the bank is really winning on two counts: they are removing an empty home from inventory and they are making interest on the money you’re paying in mortgage.

Bargaining With the Foreclosing Bank: Again, banks are in the housing business to make money, not own a lot of property. You’ll need to be flexible and be willing to work with their various departments to navigate through the entire process. Some lenders are not even willing to give out loans for foreclosed properties and some will require that you and the home meet special requirements or go through a lengthy approval process.

Consider All Your Costs: Yes, you can often buy forecloses homes for a much lower price than a regular home sale, but you may have additional costs to consider including buying appliance, housing repairs and additional home inspections. When you’re applying for a home loan to purchase a foreclosed house you’ll need take all these costs into consideration and communicate them with your bank ahead of time.

Home loan rates are expected to slowly rise over the next several years and the inventory of foreclosed homes will eventually shrink back down to pre-recession levels. If you’re looking for a good deal on a home or if you’re a first-time home buyer (and you have plenty of patience) then you may be able to take advantage of the historically low mortgage rates and the high availability of houses to buy your dream home for much less than you ever thought imaginable!