Mortgagee Letter 93-13
TO: ALL APPROVED MORTGAGEES
SUBJECT: Single Family Loan Production-Energy Efficient Mortgage
In compliance with Section 513 of the Housing and Community Development
Act of 1992 (Act), HUD is establishing an FHA Energy Efficient
Mortgage (EEM) Pilot Program for existing properties located in
the following states: Alaska, Arkansas, California, Vermont and
Virginia. This Pilot Program is effective immediately
An EEM recognizes the energy savings of a home that has "cost
effective" energy saving improvements that increase the energy
efficiency of a home. Because the home is energy efficient, the
family will save on utility costs and thereby can afford to devote
more of its income to the monthly mortgage payment. Energy efficiency
can include both energy saving and active and passive solar technologies.
Under the FHA EEM Pilot Program, a borrower can finance into the
mortgage 100% of the cost of eligible energy efficient improvements,
subject to certain dollar limitations, without an appraisal of
the energy efficient improvements. 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
mortgage includes the cost of the energy efficient improvements
in addition to the usual mortgage amount permitted by Regulations.
The detailed program requirements and processing and underwriting
procedures for the FHA EEM Pilot Program are set forth below.
I. BASIC PROGRAM
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.
B. 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 and
its cost may be added to the mortgage amount up to the greater
- 5% of the property's value (not to exceed $8,000) or,
"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:
- a utility company or,
- a local, state or Federal government agency or,
- an entity approved by a local, state or Federal government
agency specifically for the purpose of providing home energy
ratings on residential properties or,
- 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:
- Address of the property.
- Name of the current owner(s) of the property.
- Date of the property inspection.
- 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.
- Description of the improvements recommended to improve the
energy efficiency of the property.
- Estimated costs of the energy improvements, their useful life
and the costs of any maintenance over the useful life.
- Present estimated annual utility costs before installation
of the energy efficient improvements.
- Estimated annual utility costs after installation of the energy
- Estimated annual savings in utility costs after installation
of the energy efficient improvements.
- 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.
- 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.
F. An escrow account may be established for no more than three
months after loan closing to allow for installation of the energy
efficient improvements. The escrow account may be administered
by the lender, a utility company, a non-profit organization or
a government agency. The escrow account must be insured and be
established at a financial institution supervised by a Federal
AND UNDERWRITING REQUIREMENTS
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:
- 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.
- 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.
- 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.
C. The lender must include a copy of the home energy rating report
performed by the HERS or energy consultant in the closing package
when requesting insurance endorsement.
D. When calculating the borrower's maximum mortgage amount, the
lender may include as an eligible closing cost, up to $200, the
cost of the inspection report prepared by the HERS or energy consultant.
STATEMENT REQUIRED TO BE GIVEN TO ALLBORROWERS
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.
If you have any questions concerning this Mortgagee Letter, please
contact the local HUD Field Offices located in the above-mentioned
Very sincerely yours,
Nicolas P. Retsinas
Assistant Secretary for Housing - Federal Housing Commissioner