Deciphering the VA Lender’s Handbook Chapter 7 Part 9
The last article got us started on learning about like the definition and purpose of EEMs, and the requirements for getting one. This article is going to build off of the last one and rely on the basic information previously presented. In this article, we’ll be going into depth on how the EEM works and all the ins and outs of the program. Since the EEM is a fairly common choice, we may take an additional article beyond this one to cover all of the information.
Many borrowers first hear about the EEM when they receive the Notice of Value (NOV) following the official VA appraisal of the property. The NOV has the following notice to the veteran:
audit to identify needed energy efficiency improvements to the property. In
some localities, the utility company may perform this service. The
mortgage amount may be increased as a result of making energy efficiency improvements such as:
Solar or conventional heating/cooling systems,
water heaters, insulation, weather-stripping/caulking, and storm
windows/doors. Other energy-related improvements may also be
The VA strongly encourages all borrowers to look into energy-efficiency improvements to their home and even have a home energy audit conducted on their home. Having energy efficiency improvements made to your home can literally save you thousands of dollars in utility expenses. The VA has some requirements as to how much money can be spent on an EEM and under what circumstances. Up to $3,000 can be spent based on nothing but the documented costs of the improvements. The rationale here is that just about any improvements you can do that would cost $3,000 will save you at least $100 per year for the next 30 years. However, if you want to spend more than $3,000, it is required that the estimated monthly utility savings be compared to the increase in the monthly mortgage payment and be found to be equal or higher. The normal limit on an EEM is $6,000, though in special cases, approved by the VA, more can be used.
Your lender will treat your EEM differently depending on how much money the EEM is for. If the EEM is for $3,000 or less, they will not require anything beyond the basic information about the improvements as explained in the following article. For EEMs that are for more than $3,000 but less than $6,000, the lender will need to take whatever steps necessary to determine that the increase in your monthly mortgage payments due to the $6,000 is not larger than the monthly utilities cost savings. Usually, the lender can rely on information and estimates provided by utility companies or local or state agencies to make a determination.
In the event that a borrower has improvements exceeding $6,000, the lender will need to be thorough and meticulous in determining two things: that the cost savings of the improvements will be enough to at least offset (preferably exceed) the addition to the monthly mortgage payment due to the extra loan amount, and that the veteran’s income is sufficient to cover the higher loan payment. When you get beyond $6,000, it becomes a significant addition to the loan, and can even bump the loan out of the affordability range for the veteran borrower. The lender will need to get approval from the VA before clearing the higher amount.
In conjunction with the considerations the lender has different loan amounts, different documentation is required depending on the amount of the EEM. For improvements up to $3,000, the VA only needs to see evidence that the improvements will cost the amount that the borrower is taking. Getting your lender a copy of bids you’ve received for the work in question will usually suffice. For loans up to $6,000 and more than $3,000, you still need only supply the evidence of the cost of the improvements, and the lender gets whatever documentation is needed to compare the utility savings with the extra monthly payment. For improvements over $6,000, your lender will explain what is needed in your case.