Definition of Energy Efficient Mortgages (EEMs)

Eligible projects include the installation of solar heating and cooling systems, including systems designed specifically for domestic hot water use. Borrowers can also finance insulation additions for ceilings, attics, walls, floors, and water heaters, as well as furnace efficiency modifications like replacement burners or electronic ignition systems. Other common upgrades include clock thermostats, caulking, weather-stripping, storm windows and doors, heat pumps, and vapor barriers. VA encourages any measures that conserve energy, reduce water consumption, or enhance the property’s disaster preparedness.

An Energy Efficient Mortgage allows the total loan amount to exceed the reasonable value established by the VA appraiser. For a standard purchase, the maximum loan is calculated by taking the reasonable value listed on the Notice of Value (NOV), adding the cost of the energy improvements (up to $6,000), and then adding the VA funding fee. This is a rare exception to the standard rule that a VA loan cannot exceed the home’s appraised market worth. While these upgrades enhance the property, the reasonable value itself is still determined through a market-based appraisal that analyzes comparable sales and physical characteristics.

Veterans who have recently paid for energy improvements may qualify for cash reimbursement during a refinance. Under a special exception for Interest Rate Reduction Refinancing Loans (IRRRLs), up to $6,000 can be used to reimburse a Veteran for the cost of energy efficiency improvements completed within the 90 days immediately preceding the loan closing date. The borrower must provide documented evidence of the costs, such as itemized bids or contracts. For purchase loans, while Veterans typically cannot receive cash proceeds, they may receive a refund for items paid in cash (like earnest money) if those costs were later included in the total loan amount.

If the energy-efficient upgrades cannot be completed by the closing date, the lender is permitted to establish an escrow account and close the loan anyway. The lender withholds the necessary funds to finish the work and must ensure they are properly applied to the costs once the project is finalized. Generally, the VA expects these improvements to be completed within six months of the loan closing. If the lender determines after a reasonable time that the work will not be finished, the remaining escrow funds must be applied to reduce the mortgage’s principal balance, and the lender must provide written notification of this action to the VA.

Yes, the VA funding fee is impacted by the inclusion of an EEM. Unlike entitlement, which ignores the EEM portion, the funding fee must be calculated based on the full loan amount, including the total cost of all energy efficiency improvements. This rule applies to all EEM-eligible transactions, including standard purchases and all types of refinances. The specific percentage of the fee depends on parameters like the Veteran’s service history and whether they are a first-time or subsequent user. Because the funding fee itself can be financed into the loan, the final mortgage balance will reflect the home price, the upgrades, and the administrative fee.

One of the most significant benefits of the EEM program is its impact on VA entitlement. While the VA calculates its guaranty amount based on the full loan balance including the energy upgrades, the Veteran’s entitlement is only charged for the portion of the loan calculated before adding the EEM costs. For instance, if a Veteran with full entitlement adds $6,000 in upgrades to a $144,000 home purchase, their entitlement charge is based only on the $144,000. This unique structure provides the lender with a higher dollar amount of government protection without requiring the Veteran to use up more of their available lifetime home loan benefit.

Underwriting requirements become more stringent as the cost of improvements increases. For projects under $3,000, the VA generally presumes the utility savings will offset the payment increase. When the amount is between $3,001 and $6,000, the lender must perform a formal determination of economic feasibility, using local data from utility companies or state agencies to prove the savings outweigh the payment hike. Furthermore, if adding EEM costs to an IRRRL causes the new monthly payment (PITI) to increase by 20 percent or more over the old payment, the lender must certify in writing that the Veteran is financially qualified for the higher obligation.

The VA establishes strict monetary tiers for EEM financing. A Veteran can borrow up to $3,000 based solely on the documented costs of the improvements, such as a contractor’s itemized bid. For more extensive projects, the loan can be increased up to $6,000, provided the lender determines that the resulting increase in monthly mortgage payments does not exceed the projected reduction in monthly utility costs. However, federal law (38 U.S.C. §3710(d)) mandates that an EEM cannot exceed an absolute statutory maximum of $6,000. Any costs for energy improvements that go beyond this limit must be paid by the Veteran in cash from their own resources at closing.

Yes, the Energy Efficient Mortgage is highly versatile and can be added to almost any VA-guaranteed loan product. You can incorporate energy upgrades when using a VA purchase loan to buy an existing home or during a VA refinancing transaction. This includes the Interest Rate Reduction Refinancing Loan (IRRRL), regular cash-out refinances, and even Graduated Payment Mortgages (GPMs). It is also available for Native American Direct Loans (NADL) and construction-to-permanent purchase vehicles. This broad eligibility ensures that Veterans can access sustainability benefits whether they are purchasing their first home, building a new one, or updating an existing residence.

A VA Energy Efficient Mortgage (EEM) is a specialized financing option that allows Veterans and active-duty service members to increase their total loan amount to cover the costs of making specific energy-saving improvements to a home. Unlike a standalone home improvement loan, an EEM is originated in conjunction with a VA purchase loan for an existing dwelling or a VA refinancing loan secured by the property. The primary goal of this program is to enhance the home’s basic livability and utility while significantly reducing long-term energy costs for the borrower. This allows Veterans to fold modern, sustainable upgrades directly into their primary mortgage, ensuring a safe, sound, and sanitary living environment.