Financing Energy Efficiency: An EEM Handbook

TO: ALL APPROVED MORTGAGEES

A. Only existing one and two unit properties located in the above mentioned States are eligible. New construction is not eligible, nor are three and four unit existing properties.

1. 5% of the property's value (not to exceed $8,000) or,
2. $4,000.

"Cost effective" means that the total cost of the improvements, including any maintenance costs, is less than the total present value of the energy saved over the useful life of the energy improvement. The FHA maximum loan limit for the area may be exceeded by the cost of the energy efficient improvements.

C. The cost of the energy improvements (including maintenance costs) and the estimate of the energy savings must be determined based upon a physical inspection of the property by a home energy ratings system (HERS) or energy consultant.

The HERS or energy consultant must be an independent entity, not related, directly or indirectly, to the seller of the property or the prospective borrower. The contractor selected by the borrower to install the energy efficient improvements may not be related, directly or indirectly, to the HERS or energy consultant. The HERS or energy consultant may be:

1. a utility company or,
2. a local, state or Federal government agency or,
3. an entity approved by a local, state or Federal government agency specifically for the purpose of providing home energy ratings on residential properties or,
4. a non-profit organization experienced in conducting home energy ratings on residential properties.

D. The home energy rating report prepared by the HERS or energy consultant must be a written report provided to the prospective borrower and lender and it must contain the following information:

1. Address of the property.
2. Name of the current owner(s) of the property.
3. Date of the property inspection.
4. Description of the energy features currently in the property. This must include, at a minimum, a description of the insulation R values in ceilings, walls and floors; infiltration levels and barriers (caulking, weather-stripping and sealing); a description of the windows (storm windows, double pane, triple pane etc.) and doors; and a description of the heating (including water heating) and cooling systems.
5. Description of the improvements recommended to improve the energy efficiency of the property.
6. Estimated costs of the energy improvements, their useful life and the costs of any maintenance over the useful life.
7. Present estimated annual utility costs before installation of the energy efficient improvements.
8. Estimated annual utility costs after installation of the energy efficient improvements.
9. Estimated annual savings in utility costs after installation of the energy efficient improvements.
10. Printed name(s) and signature(s) of the person(s) that inspected the property and prepared the report and the date of preparation of the report.
11. The following certification, signed by the person(s) who inspected the property and prepared the report, must accompany the report:

"I certify, that to the best of my knowledge and belief, the information contained in this report is true and accurate and I understand that the information in this report may be used in connection with an application for an energy efficient mortgage to be insured by the Federal Housing Administration of the United States Department of Housing and Urban Development."

E. A mortgage for the purchase or refinance (including rate reduction streamline refinance) of a property to be insured under Section 203(b), Section 221(d)(2) or Section 234(c) is eligible for this EEM Pilot Program. For streamline refinance transactions, however, lenders are reminded that the borrower's monthly payment for principal and interest for the refinance mortgage (which will include the cost for the energy efficient improvements) must be lower than the monthly principal and interest on the current mortgage.

A. The lender will first process the mortgage loan application and qualify the borrower using our standard underwriting requirements and qualifying ratios. If the borrower elects to have an EEM and add the cost of the energy efficient improvements to the mortgage, the lender must take the following additional steps:

1. The lender must obtain a report prepared by a HERS or energy consultant showing the estimated costs of installing the energy efficient improvements (including any maintenance costs) and the estimated annual savings in utility costs that will result from the installation of the energy efficient improvements.
2. Using the HERS or energy consultant's report, the lender must determine that the energy efficient improvements are "cost effective" by calculating the present cost of the energy improvements, including maintenance costs, if any, over the useful life of the improvements and the present value of the energy savings over the useful life of the energy improvements. If the energy efficient improvements meet the "cost effective" test, i.e. present cost of improvements is less than the present value of the energy savings, then the lender may add 100 percent of the cost of the energy efficient improvements (subject to the dollar limits in paragraph IB, above) to the otherwise allowable maximum mortgage amount. (See Attachment A to this letter for examples showing how to make these calculations and Attachment B to this letter which is an EEM Worksheet that must be used to qualify the borrower for the mortgage before adding the energy efficient improvements and then to calculate the EEM amount. If the mortgage is an EEM, Attachment B must be attached to the Mortgage Credit Worksheet (Form HUD-92900WS) when the lender submits the case for insurance endorsement). No appraisal of the energy efficient improvements is necessary and the borrower need not meet any further credit standards. If the energy efficient improvements meet the "cost effective" test, then the full cost of the improvements can be added to the borrower's base loan amount without a determination of value and without further credit qualification.
3. The lender will calculate the up front mortgage insurance premium on the full mortgage amount (which will include the cost of the energy improvements). Closing can then occur.

B. HUD will insure the mortgage before the energy efficient improvements are installed, provided the lender establishes an escrow account and deposits to it the funds to pay for the energy efficient improvements. The escrow account shall be for a period of no more than 90 days. If the improvements are not installed with 90 days, the lender must apply the funds held in escrow to a prepayment of the principal balance of the mortgage. The escrow account may be established by the lender and administered by either the lender, a utility company, a non-profit organization or a government agency. However, the lender is responsible for assuring HUD that the escrow has been cleared. Lenders shall execute form HUD 92300, Mortgagee Assurance of Completion, to indicate that the escrow for the energy efficient improvements has been established and the lender, subsequently, is responsible for notifying HUD that the improvements have been installed and that the escrow has been cleared. The installation of the improvements may be inspected by the lender, the HERS or a HUD fee inspector and the borrower may be charged an inspection fee in accordance with the local HUD Field Office fee schedule.

The Act requires that all applicable borrowers receive a Disclosure Statement informing them of the FHA EEM program requirements and the benefits of an EEM. Therefore, the attached disclosure statement (Attachment C to this letter) must be signed and dated by all borrowers at the time of initial loan application who are either purchasing or refinancing with FHA mortgage insurance, an existing one or two unit property in the above five states. This Disclosure Statement must be given to all applicants effective for sales contracts (or initial loan applications for refinance transactions) signed on or after July 1, 1993. A photocopy of this Disclosure Statement, signed by the borrowers, must be included in the case binder when the case is submitted to the Field Office for insurance endorsement.