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Stylized Text: Home Energy Ratings.

Financing Energy Efficiency: An EEM Handbook

October 6, 1995


Mortgagee Letter 95-46


SUBJECT: Single Family Loan Production - Expansion of the Energy Efficient Mortgage Program

On May 24, 1993, the Department implemented the FHA Energy Efficient Mortgage (EEM) Pilot Program for existing one and two-unit properties in the following states: Alaska, Arkansas, California, Vermont, and Virginia. The Department is now expanding the EEM Program nationwide, and includes new construction in compliance with Section 513 of the Housing and Community Development Act of 1992.

The detailed program requirements, processing instructions and underwriting procedures for the EEM Program remain the same as those set forth in Mortgagee Letter 93-13(attached). The only modifications to Mortgagee Letter 93-13 are that both 203(k) Rehabilitation Mortgages and Adjustable Rate Mortgages are now allowable under the EEM Program, and that new as well as

existing construction is included. The expansion of the EEM 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 improvements can include both energy saving equipment and active and passive solar technologies.

Under the FHA EEM Program, a borrower can finance into the mortgage 100 percent of the cost of eligible energy efficient improvements, subject to certain dollar limitations, without an appraisal of the energy improvements and without further credit qualification of the borrower.

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 FHA maximum loan limit for the area may be exceeded by the cost of the eligible energy efficient improvements. The cost of the energy improvements and the estimate of the energy savings must be determined based upon a physical inspection of the property by an accredited home energy rating system (HERS) or qualified energy consultant.

For new construction, the energy improvements must be over and above those required for compliance with the current FHA energy conservation standards for new construction. The estimate of the energy savings in new construction must be based upon a comparison of plans and specifications of the house with the additional energy saving improvements to those of the basic house which complies with the current FHA energy conservation standards. Presently, these standards are those of the CABO 1992 Model Energy Code (MEC).

In order to obtain a more accurate estimate of the cost savings for each improvement, an alternative Energy Efficient Mortgage Worksheet (Attachment B to Mortgagee Letter 93-13) has been created. The new worksheet (Attachment B1) includes an Energy Efficient Premium Table which allows each eligible improvement to be assigned its own useful life. The optional worksheet is attached and can be used as an alternative to Attachment B of Mortgagee Letter 93-13.

Please note that the program disclosure statement requirement has changed. The program no longer requires that all applicable borrowers receive a separate Disclosure Statement informing them of the FHA EEM program. Instead, at the next revision, language will be added to the FHA disclosure notice, Important Notice to Home buyers. Realizing the importance of some form of disclosure notice, lenders are requested to use alternative methods of informing potential home buyers of the EEM Program. As a temporary substitute, lenders may use the attached FHA Fact Sheet as a disclosure statement. If you have any questions concerning this Mortgagee Letter, please contact the local HUD Office.

Sincerely yours,  

Nicolas P. Retsinas
Assistant Secretary for Housing-
Federal Housing Commissioner

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