If you're buying a home that needs energy efficiency improvements or want to make your current home more efficient, the VA Energy Efficient Mortgage program offers a valuable financing option. A VA EEM allows you to include the cost of energy-efficient improvements in your VA loan. This little-known benefit helps Veterans lower utility bills and increase property value while financing everything in a single mortgage.
What is a VA Energy Efficient Mortgage?
A VA Energy Efficient Mortgage lets you finance energy-efficient improvements as part of your home purchase or refinance. According to the VA, this program recognizes that energy improvements reduce long-term housing costs and benefit both homeowners and the environment.
The concept is straightforward: the VA allows your loan amount to exceed the home's appraised value to cover energy upgrades. These improvements lower your utility bills, so even though your mortgage payment increases slightly, your overall housing costs may decrease or remain similar.
How Much Can You Borrow with a VA EEM?
You can borrow the lesser of two amounts: up to $6,000 over the home's appraised value without requiring additional documentation beyond the energy report, or the full cost of improvements if you can demonstrate that the utility cost savings will cover the increased mortgage payment over the improvement's useful life.
The $6,000 option requires less documentation. For improvements costing more than $6,000, an energy consultant must prepare a report showing expected utility cost reductions. The report calculates whether monthly savings cover or exceed the increased mortgage payment.
Eligible Energy Improvements
According to VA guidelines, eligible improvements include:
Insulation improvements: Adding or upgrading insulation in attics, walls, floors, crawl spaces, or basements.
Energy-efficient windows and doors: Replacing single-pane windows with double or triple-pane models, or upgrading to better-insulated doors.
Heating and cooling system upgrades: Installing high-efficiency furnaces, heat pumps, air conditioners, or improved ductwork.
Solar panels and renewable energy systems: Adding solar panels, solar water heaters, or other renewable energy systems.
Water heaters: Replacing old water heaters with high-efficiency or tankless models.
Weatherization: Sealing air leaks, adding weather stripping, or other improvements that prevent conditioned air from escaping.
Luxury upgrades that happen to be energy-efficient don't automatically qualify. The improvement must primarily serve an energy efficiency purpose. Improvements must meet local building codes and be permanently affixed to the property.
How the VA EEM Process Works
Step 1: Find a Home and Get Pre-Approved
Start with standard home shopping and loan pre-approval. Let your lender know you're interested in using a VA EEM from the beginning.
Step 2: Identify Needed Improvements
Once you've found a home, identify which energy improvements make sense. Walk through the home with energy efficiency in mind. Is the attic insulation adequate? Are the windows single-pane? How old is the HVAC system?
Step 3: Get an Energy Report
For improvements under $6,000, you need a simple energy report identifying the improvements and their estimated costs. For amounts over $6,000, you'll need a more detailed report showing utility savings calculations. Energy consultants, qualified contractors, or certified home energy raters can provide these reports.
Step 4: Get Contractor Bids
Obtain written bids from licensed contractors for the planned improvements. Get at least two bids for major improvements to ensure competitive pricing.
Step 5: Loan Processing and Approval
Your lender submits the loan with the additional amount for energy improvements. The underwriter reviews everything including the energy report and contractor bids.
Step 6: Completing the Improvements
After closing, you typically have 90 to 180 days to complete the improvements. The funds for improvements are held in escrow and released to contractors as work is completed and inspected.
VA EEM for Purchase vs. Refinance
Most Veterans use EEMs when purchasing because it's simpler to coordinate improvements right after closing. When buying with an EEM, negotiate with the seller about the home's condition. Some sellers are willing to reduce the price slightly if you're handling improvements yourself.
You can also use an EEM when refinancing your current VA loan. This works well if you've identified energy improvements and want to finance them without taking out a separate home equity loan.
Benefits of VA Energy Efficient Mortgages
Lower Utility Bills: Depending on the improvements, you might save $50 to $200 or more monthly on utilities. According to the Department of Energy, comprehensive energy improvements can reduce home energy use by 25% to 40%.
Improved Home Comfort: Better insulation means fewer drafts and more consistent temperatures. New windows reduce outside noise. Efficient HVAC systems maintain better humidity control.
Increased Property Value: Energy-efficient features increasingly appeal to homebuyers and can increase your home's resale value, sometimes by more than the improvement cost.
Single Financing Transaction: Rather than taking out a separate loan for improvements, you finance everything in your mortgage at your VA loan's favorable interest rate.
No Additional Down Payment Required: The additional funds for energy improvements don't require a larger down payment.
Potential Drawbacks and Considerations
Additional Complexity: Adding energy improvements creates additional steps and documentation. In competitive markets, this might make your offer less attractive to sellers.
Contractor Coordination: You need to manage contractors and ensure improvements are completed within the required timeframe.
Limited Funding Amount: The $6,000 limit without extensive documentation means you can't finance major energy overhauls without proving significant savings.
Increased Loan Balance: Adding improvement costs means a higher monthly payment and more interest paid over the loan's life, though utility savings offset this.
Comparing VA EEM to Other Options
Home Equity Loans or HELOCs typically carry higher interest rates than VA loans and require you to have equity. A VA EEM keeps everything in one mortgage at your VA loan rate.
Personal Loans for home improvements have much higher interest rates and shorter repayment terms. A VA EEM is almost always cheaper.
VA Cash-Out Refinance lets you refinance for more than you owe and use the difference for improvements. However, cash-out refinances have higher funding fees than EEMs.
Before using an EEM, research federal, state, and local energy efficiency incentives. The Database of State Incentives for Renewables & Efficiency helps you find programs offering rebates, tax credits, or low-interest loans. You can combine EEM financing with available incentives.
Tips for Successfully Using a VA EEM
Start Planning Early: Discuss EEM possibilities during pre-approval so everyone understands the plan.
Focus on High-Impact Improvements: Prioritize improvements with the best return on investment. Adding attic insulation typically offers better energy savings per dollar than many other improvements.
Choose Qualified Contractors: Work with licensed, insured contractors experienced with energy-efficient installations. Check references and verify licensing.
Document Everything: Keep detailed records of all reports, bids, contracts, invoices, and inspection results.
Consider Timing: If buying in winter, scheduling exterior improvements might be difficult. Plan which improvements can wait until spring.
Making Energy Efficiency Affordable
VA Energy Efficient Mortgages offer a practical way to improve your home's efficiency without draining your savings or taking on high-interest debt. While the program involves additional steps, the long-term benefits of lower utility costs, improved comfort, and increased property value often make the effort worthwhile.
If you're buying a home that could benefit from energy improvements or want to make your current home more efficient, explore whether a VA EEM makes sense. Talk with your lender about the process, get preliminary estimates from contractors, and determine if the savings justify the additional loan amount. Read more about VA mortgages.
FAQs
Can I use a VA EEM for solar panels?
Yes, solar panel installation is an eligible improvement. Solar systems often cost more than $6,000, so you'll need an energy report demonstrating that utility savings justify the loan increase. Many solar installations easily meet this requirement.
Do energy improvements need to be completed before closing?
No, improvements are typically completed after closing. The funds are held in escrow and released to contractors as work is completed and inspected, usually within 90 to 180 days.
Can I use an EEM on a condo or manufactured home?
Yes, VA EEMs can be used for condos and manufactured homes. For condos, you can only finance improvements to your unit and any exclusive-use areas you're responsible for maintaining.
Will using an EEM affect my debt-to-income ratio?
Yes, the higher loan amount increases your monthly payment, which affects your DTI. However, lenders may consider documented utility savings as offsetting income when calculating DTI. Discuss this with your lender during pre-approval.
Can I combine a VA EEM with a VA renovation loan?
VA EEMs are distinct from VA renovation loans. Renovation loans are for more extensive improvements, including structural repairs. EEMs specifically finance energy efficiency improvements. You typically use one or the other, not both simultaneously.
