Deciphering the VA Lender’s Handbook Chapter 7 Part 8
The past two articles were dedicated to explaining VA construction loans in most of their aspects. While many VA-approved lenders do not offer construction loans, for the dedicated borrower insistent on getting one, there is usually a way. This article is going to get started on energy efficient mortgages (EEMs). We’ll be covering what an EEM is, what it can be used for, and the requirements for getting one. EEMs have been mentioned in many previous articles but have not been referred to by that name. I’ll explain why throughout the article.
An EEM is a loan that covers the cost of making energy efficiency improvements to a dwelling. A borrower does not make an EEM by itself; rather, it is made as an add-on to a VA loan for a new purchase or a VA refinance. The EEM is considered part of the main loan and is allowable on most new purchase loans, interest rate reduction refinances loans, and cash-out refinances. There are some restrictions on what the EEM can be used for, but the Handbook offers a good list of things that can be approved for an EEM. Acceptable uses are not limited by the things on this list; if you have an improvement to your home that you’d like to do, but it does not appear on this list, consult with a VA-approved lender. Here is the list:
- solar heating systems, including solar systems for heating water for domestic use,
- solar heating and cooling systems,
- caulking and weather-stripping,
- furnace efficiency modifications limited to replacement burners, boilers, or furnaces designed to reduce the firing rate or to achieve a reduction in the amount of fuel consumed as a result of increased combustion efficiency, devices for modifying flue openings which will increase the efficiency of the heating system, and electrical or mechanical furnace ignition systems which replace standing gas pilot lights,
- clock thermostats,
- new or additional ceiling, attic, wall, and floor insulation,
- water heater insulation,
- storm windows and/or doors, including thermal windows and/or doors,
- heat pumps, and
- vapor barriers.
As you can see, nearly any improvement, big or small, to your house that will save you money on your utilities can qualify for an EEM. Feel free to ask a VA-approved lender if you have an improvement you’d like to make and are hoping it can be covered with an EEM.
As mentioned before, an EEM is considered part of the main loan, and as such is secured by a first lien on the home. For you first-time home buyers out there, a lien is essentially the right to use your home as collateral to secure the loan you got to purchase the property. You legally own the home, but the holder of your lien can take the home from you (foreclosure) if you default on your loan. There may be more than one lien on your home, depending on if you have a second mortgage or another loan in which they took a lien on your home. If there is more than one lien on your home, they are referred to as “first”, “second” and so on in the order of the claim they have on the home in the event that you default on your obligations to more than one of the lien holders. The VA loan program requires that all VA loans be secured by a first lien on the property, and that includes the funds that are provided as an EEM.
Another thing to keep in mind is that if the borrower is planning on performing the labor by him or herself, only the amount necessary to pay for materials will be loaned. The limit on EEMs is $6,000, which is usually enough for one or two large improvements, or up to dozens of small ones. If you have a lot of improvements you’d like done to the home, and you’re handy enough to do many of them yourself, you can get a lot of value out of that $6k. The lender is responsible for determining that the proposed improvements are reasonable and viable for both the property and the requested loan amount.