Financing Energy Efficiency: An EEM Handbook

Under this Pilot Program, the energy efficiency of a home will be rated by an Accredited Home Energy Rating System Provider (HERS). upon completion of the HERS rating the property may be eligible for:

• the Energy Improvement Mortgage (EIM) - which provides financing for acquisition or refinance plus additional funds to make certain recommended energy saving improvements to the property; and/or

The borrower may be eligible for:

• the Energy Efficient Mortgage (EEM) - which considers energy savings in qualifying the borrower for property that is already energy efficient as determined by the HERS rating.
• when an existing, energy-inefficient property is improved to a certain level of energy efficiency, both components (EIM and EEM) can be utilized.

The Energy Policy Act of 1992 required DOE to develop uniform, voluntary guidelines for rating the energy efficiency of homes. In response, the Home Energy Rating Systems Council, working under contract to DOE, developed a set of national guidelines (the HERS Guidelines) for home energy ratings and rating organizations. The purpose of the HERS Guidelines is to provide an accurate measure of a home's energy efficiency using a methodology that is uniform throughout the United States.

The EEM allows the lender to qualify using higher debt-to-income ratios because the property is:

• determined to be "energy efficient" in its present condition by the HERS rating; or
• will be improved to a level of efficiency determined to be "energy efficient" by the HERS rating (utilizing the EIM financing).

In the event the property is determined to be "energy efficient" in its present condition, the lender may use an automatic 2 percent increase in the maximum qualifying ratios.

• the 2 percent automatic increase in qualifying ratios; or
• increase the borrowers ratios by the dollar amount of the "estimated monthly energy savings" (shown on the HERS rating) because of the energy improvements being made under the EIM.

In order to qualify as "energy efficient" the property must achieve a minimum HERS rating equivalent to or greater than:

• The rating achieved by a home that meets the requirements established by the council of American Building Officials Model Energy Code of 1992 (CABO-MEC 92).

The EIM allows the lender to include the cost of making energy improvements to the property in the mortgage loan. To be eligible:

• the improvements being made must increase the HERS rating by at least 10 points (on a 100 point scale) .

If an existing ;property does meet the threshold for an EEM (92 CABO-MEC), the lender may still use the estimated monthly energy savings in qualifying the borrower for the mortgage as long as the 10 point rating increase is achieved by the improvements. For example, if the borrower will reduce the estimated monthly utility expense by $50 and increase the HERS rating by at least 10 points, the lender may increase the borrower's maximum monthly housing payment (PITI) at 28 percent by $50.

The combination of the EIM and the EEM allows the lender to include the cost of making energy improvements to the property in the mortgage and to qualify the borrower using either the 2 percent higher debt-to-income ratios or the amount of the "estimated monthly energy savings" (shown on the HERS rating), whichever is more beneficial (but the 2 percent increase and the estimated energy savings may not be combined).

The following documentation will be required as part of the loan file for all mortgages under the EEM/EIM Pilot Program:

• the existing rating
• existing energy features in the property
• recommended improvements
• an estimate of the utility savings
• the present value of the estimated savings
• the mortgage rate used for the present value calculation
• the estimated rating after improvements are considered.

The HERS Rating Certificate is the documentation for determining the energy efficiency of the improvements made to the property.

2. Energy Appraisal Addendum (Fannie Mae EEM/EIM Pilot Form) including:

• the Energy Efficiency Value Increment
• the total estimated value by the appraiser
• the special limiting conditions for the appraiser

Appraisers will use this form as an attachment to the URAR to determine the Final Value Estimate, and lenders will use this form as the basis for calculating the LTV.

Mortgages delivered to Fannie Mae under the EEM/EIM Pilot Program must comply with existing Fannie Mae guidelines except as modified below:

1. For an EEM, if the final energy efficiency rating equals or exceed the thresholds established for the Pilot Program:

• the borrower may be qualified using a maximum monthly housing expense ratio of 30 percent and/or a maximum monthly debt ratio of 38 percent without additional Justification by the Lender; or,

The rating certificate must be included in the mortgage file and must show at least the following rating;

• the rating point equivalent to that achieved by a property that meets the minimum requirements of the CABO-MEC 92.

2. For an EIM, if the energy efficiency rating of the home will be improved by at least 10 points as a result of the upgrades made:

• the borrower may be qualified at the housing expense ratio and total debt ratio which results from adding the expected monthly savings (shown on the rating certificate) to the mortgage PITI at 28 percent. The ratio resulting from this calculation will be considered supported with no further explanation or justification by the Lender.

The rating certificate must be included in the mortgage file and must show at least a 10 point increase in the property's rating as a result of the energy improvements made.

1. The threshold for an EIM that allows improvements to be financed is:

• the energy rating must increase 10 points (on a 100 point scale) as a result of the improvements;

2. If the energy rating certificate in the mortgage file indicates that the property exceeds the threshold for an EIM, the cost of the energy improvements may be included in the mortgage to the extent supported by value:

• For a purchase mortgage, this means that the purchase price is considered to be the contract price for the property plus the installed cost of the improvements. The LTV must be based on the lower of purchase price or appraised value.
• For a refinance mortgage, this means that the LTV must be based on the appraised value (including the improvements).

3. The appraised value of the property must be based on the market value indicated by the sales comparison approach plus the Energy Efficiency Value Increment, which is the lower of:

• the installed cost of the energy improvements, or
• the present value of the expected energy savings (shown on the rating certificate).
• The appraiser must attach the completed Energy Appraisal Addendum, (Fannie Mae EEM/EIM Pilot) showing the calculation; to the appraisal. The Lender is responsible for underwriting the appraisal and concluding that it supports the appraiser's assumptions data, analyses, rationale and conclusions concerning the market value of the property. The Energy Efficiency Value increment will be provided by the Accredited HERS and will be added to Market Value by the appraiser to achieve Total Estimated Value. During the pilot, Fannie Mae acknowledges that energy efficiency property comparables do not exist and will accept the Total Estimated Value described above as the appraised value.

4. If the energy improvements are not completed before loan delivery, the Seller may escrow for the completion of the energy improvements under the following terms:

• the improvements must be satisfactorily completed within 120 days after closing;
• an escrow account in the borrower's name must be established and disbursements from that account must be controlled by the Lender;
• the amount in the escrow account must equal 110 percent of the amount required to complete the improvements, unless the contractor offers a guaranteed-fixed price" contract, in which case the escrow account may equal 100 percent of the contract price;
• not more than 10 percent of the original principal balance may be disbursed from the mortgage into the escrow account. Any additional funds must come from borrower funds, including the 10 percent contingency required (if applicable) for the escrow, (i.e., the contingency may never come from the mortgage); and
• upon completion of the improvements, the lender must obtain and keep in the mortgage file a satisfactory certificate" of Completion (Fannie Mae EEM/EIM Pilot Form 1) and a final energy rating certificate. If the installed cost of the improvements is less than the amount escrowed, the excess must be applied to reduce the principal balance of the loan. Any contingency funds left in the escrow account (that were originally funded by the borrower) may be disbursed back to the borrower.

5. The borrower may not include the cost of the energy rating in the mortgage or improvement costs. The lender may pay both the cost of the rating and the escrow contingency for the borrower from premium pricing. However, if the lender provides the contingency, any funds left at the close of escrow must be applied to reduce the principal balance of the loan (and not be refunded to the borrower).

In addition to all the documentation normally required to be in the file for the mortgage sold to Fannie Mae:

• the HERS Energy Efficiency Rating Form which must show an efficiency rating above the 92 CABO-MEC threshold a list of the energy features in the property, and an estimate of utility savings.

2. For an EIM, the mortgage file must contain:

• the HERS Energy Efficiency Rating Form which must show an efficiency rating improvement of at least, 10 points, a list of the energy features in the property, the weighted life of the energy features, the mortgage interest rate used for the PV calculation, the present value factor, the installed cost of the improvements, the expected monthly savings, and the present value of the savings; and
• the Appraisal Addendum to the URAR (Fannie Mae EEM/EIM Pilot Form 1) completed by the appraiser to show the market value, the energy efficiency increment to value and total value. This form must be signed by the appraiser and attached to the appraisal report.
• the Certification of Completion (Fannie Mae EEM/EIM Pilot Form 2) to be signed by the certified energy rater, the homeowner, and the contractor in order to release escrow funds.

3. For a combination EIM/EEM mortgage, all of the above documents are required.

In addition to the mortgage data normally required at delivery, the Lender must include the Special Feature Code 124 designation when delivering a loan under the EEM/EIM Pilot Program. when completing the appraised value, the Lender must use the total estimate of the value shown on the appraisal addendum.