WHAT IS THE VA ENERGY EFFICIENT MORTGAGE? (VAEEM)
The VA energy efficient mortgage (VAEEM) is available in fixed rate or adjustable rate(ARM). The VA energy efficient mortgage is “added on” combined with another standard VA home loan or the VA streamline refinance IRRRL program. VA borrowers do not have to qualify separately for a VAEEM, if you qualify for a VA mortgage you qualify for a VAEEM. The VAEEM is a unique loan program available only to qualified veterans providing financing for purchasing compatible new energy efficient certified green homes, or helping the veteran to refinance energy efficient green renovations on older conventional “brown” homes. The dwelling must be veteran occupied not an investment property to qualify for a VA energy efficient mortgage.
These VA energy efficient mortgages aka as VAEEM lowers the residential greenhouse gas emissions, resulting in a smaller carbon footprint providing a unique powerful financing option available for qualified veterans which include: no dishonorable discharges, active duty, Armed forces, National guard or Reserves. The veteran is responsible to obtain a certificate of eligibility(COE) as part of the VAEEM qualifying underwriting process. The COE can be accessed by all VA lenders who have access to the Department of Veterans Web veteran loan guarantee database.
In 2016 active duty veterans compromise 2% of the home buying market. All veterans now account for almost 20% of the home purchasing market! This is due to the favorable terms of all types of VA mortgages offered to veterans who have honorably served America!
Energy efficient upgrades
Once a qualified veteran decides to purchase a home, and after the VA appraisal is completed, the future homeowner will be informed they have an option to include energy/water efficient (EE) improvements into the permanent mortgage financing. Form CRV, VA 26-1843 Certificate of reasonable value included in all VA mortgages outlines the available EE options to the veteran mortgage borrower. Typical annual conventional home energy costs are now over $2,000 annually, which can easily exceed over $60,000 dollars over the life of a 30 year mortgage.
Energy efficient upgrades: lower monthly utility expenses, increases the appraisal value, marketability, lower green house gas emissions, and provide increased indoor comfort of the conventional dwelling.
For example: If a veteran is approved for a 300,000 dollar mortgage, to purchase a 300,000 dollar home. The borrower can add $6,000 in energy/water efficiency improvements without having to reapply for the higher amount of 306,000 for a VA energy efficient mortgage. The energy/water efficiency improvements reduce your monthly utility costs. The VA energy efficient mortgage VAEEM allows all energy improvements to be financed at a lower interest.This eliminates initial out of pocket costs that are usually financed by: a second mortgage, Pace loan or a credit card. The VAEEM allows borrowers to finance improvements they may not otherwise afford. There are three tiers of VA energy efficient mortgages amounts ranging from $3,000 to $6,000 dollars. Higher amounts may be available so it is prudent you consult with a qualified VAEEM lender. Due to the additional paperwork involved not all lenders participate in the VA energy efficient mortgage program.
- The VAEEM mortgage may be increase up to $3,000 based on a copy of the green contractor bids, itemizing the ROI of improvements and their costs.
- From $3,000 to $6.000 providing the increase mortgage payment does not exceed the reduction in monthly utility costs.
- More than $6,000 up to the discretion of the Veterans administration.
VA energy efficient mortgages are guaranteed by the veterans administration and have lower interest rates than comparable, FHA, Freddie Mac or Fannie Mae mortgages. Typically some where between 25 -50 basis points, (1/4-1/2%) as the mortgage market fluctuates with the approximate yield of the 10 year treasury bond. The veteran is not limited to any specific VA mortgage amount. The mortgage amount is determined by the veterans borrowing ability.(W-2/plus assets) Other benefits of VA mortgages include: 100% financing with no down payment, no private mortgage insurance(PMI), low one time VA funding fee from zero percent to 3.3%, included in the VA energy efficient mortgage, easier qualifying credit scores and no prepayment penalty!
Green certified homes are in market demand, and are now documented by green appraisers to have a higher resale value ranging up to 12%. Acceptable energy efficient green remodeling covered by the VAEEM guidelines can include any of the following items:
1. Heat pumps and clock thermostats.
2. New insulation, to the ceiling, attic, walls and floors.
3. Installing solar heating and high SEER cooling systems.
4. Caulking, sealing, and weatherization to the home.
5. Vapor barriers.
6. Installing thermal Storm windows and doors.
7. Water heater insulation.
8. Upgrading to high efficiency furnaces designed to reduce the firing rate, resulting in less fuel consumed. Sealing all HVAC duct work. Energy star appliances, stoves, and refrigerators. Geothermal is now becoming more cost effective.
9. Other energy efficient improvement’s may be considered. One such example could be water conservation fixtures, Faucets, shower heads and low flow toilets. Starting in January 2017 all homes over 20 years old in California renovations will be required by law to install water conservation fixtures. These low flow fixtures such as Water sensecertified can conserve 35% or more water. Grey water recycling systems are starting to become more common.Consult your VA energy efficient mortgage lender for more specific details!
WHAT IS THE HERS SCALE?
One tool for measuring green efficiency is the HERS scale which ranges from zero to 100. The HERS scale was developed by Resnet and is used by government agencies to measure the energy efficiency of residential homes. The lower the numeral score on the HERS scale the more energy efficient the home is constructed. At the extreme end of the HERS scaleis zero. When a home scores a zero on the HERS scale.The home is stated to be net zero. Meaning the home consumes as much energy as the home generates. This can be accomplished through a combination of on site solar panels, geothermal heat pumps, and storage batteries. Using a carefully selected list of green features it is now possible to achieve net zero energy status. Meaning the home now has no utility bills. Net zero homes are a nascent technology and is the future of certified green building. In the near future government regulations will require net zero energy status(NZE) for commercial buildings.
It’s important to note that all types of VA mortgages require an appraisal by an approved VA appraiser who may not be intimately familiar with constantly evolving green building techniques. Therefore it is the VA home borrowers responsibility to request a knowledgeable VA green appraiser who has the prerequisite knowledge of energy efficiency, net zero energy, and certified green building techniques. If the borrower feels the VA appraiser is not qualified, you have the right to request another appraiser. The Appraisal Independent requirement(AIR) policy requires all appraisers to be competent before accepting their assignment. This includes all types of certified green building. A qualified green appraiser is the crucial “middleman” who assigns the appropriate value to collateralize the green mortgage …vaeem….va energy efficient mortgage. Properly documenting all green features and assigning a current market aggregate green metric value.
When the VA energy efficient mortgage (VAEEM) is less than $3,000 the VA mortgage lender will typically ask the borrower to verify the expected monthly savings to offset the additional VAEEM mortgage amount. Usually this modest mortgage increase is offset by basic energy efficient improvements and is easily accepted. Examples can include, water heater blanket insulation, water conservation fixtures, clock thermostat’s, upgrades to the furnace burner, and basic home weatherization.
$3,000 to $6,000 INCREASED MORTGAGE AMOUNT
When the VA energy efficient mortgage costs are between $3,000-$6,000 VA lenders will analyze the selected energy efficient improvements projected monthly savings to determine if the improvements do not exceed the benefits of the increased mortgage amount. The VA lender can use their desecration. The VA green lender can use supporting documentation from local utility companies for annual bench marking comparison rates to meet VA energy efficient mortgage underwriting guidelines.
When the VA energy efficient mortgage exceeds $6,000 the VA green lender will require the renovated home to have an energy audit to verify the proposed energy/water efficient (EE) improvements will be offset by the higher mortgage amount. The ecorater will use the HERS scale to indicate the numerical score of the dwelling’s energy efficiency. The ecoraters report will itemize and list the proposed energy/water efficiency improvements and document the expected return on investment (ROI). Formal written bids, an itemized worksheet from qualified greencontractors will be acceptable for documenting each selected improvement and their respective initial costs. VA form 26-1820 Report and Certification of VAEEM loan disbursement will be required.
For higher amounts, exceeding the $6,000 threshold, their are additional VA energy efficient mortgage green underwriting requirements. One common example would be if solar panels, geothermal, or thermal windows are installed a green appraisal will be required validating the total cost of the solar panels/low E windows increase the total appraisal value of the conventional dwelling. Green appraisers will use the solar appraisal tool in this circumstances. Veterans can review a comprehensive report from MIT indicating solar panels can now pay homeowner dividends over a 30 year period! The VA lender must also reevaluate the borrowers ability to repay the higher VA energy efficient mortgage amount.
VA energy efficient mortgages have different green underwriting criteria from FHA, Freddie Mac, and conventional mortgages. The VAEEM is subject to the veteran borrowers “residual income“. This is one of the reasons VA energy efficient mortgages, VAEEM’s have the lowest default rate among all mortgage classes, after allowing 100% financing with no down payment!
CAN I START THE ENERGY EFFICIENT UPGRADES PRIOR TO CLOSING MY VAEEM MORTGAGE?
A unique aspect of the VA energy efficient mortgage is the veteran can start the energy efficient upgrades prior to closing. For green renovations that occur after closing all funds will be held in escrow, released after proof of completion of the renovation. The veteran has 180 days to complete all the energy efficient improvements. After all the energy/water efficiency improvements have been completed. A final inspection will performed by the ecorater, green lender, or green appraiser. The homeowner and lender then verify all funds have been properly dispersed from the VA energy efficient mortgage escrow account. In the event all the improvements are not completed for any reason what so ever, any remaining escrow funds will be applied to reduce the VA energy efficient mortgage principal balance.
The lender will then be required to submit written verification to the VA office of jurisdiction as this effects the home borrowers outstanding principal mortgage amount over the amortization period.
All the proposed increased VA energy efficient mortgage escrow amounts are for materials only, If the veteran is performing the work their labor is not included into the higher VA energy efficient mortgage amount. However the homeowner will gain “sweat equity” which will be included in the increased green appraisal value of the dwelling. Combining the two, high ROI green renovations and sweat equity intelligently can significantly increase the value of the property. Handyman veterans could buy and renovate conventional homes every couple of years. Rolling over and aggregating their green equity with sweat equity. What started out as a small starter home could be parlayed into a million dollar retirement home. Additional benefits could include: up to 30% local, state and Federal tax credits.
Energy efficient mortgages are available to the general public and are now slowly coming into vogue. However when qualified Veterans combine their VA mortgage eligibility and the energy efficient mortgage, they are in a unique borrowing position and may be likely to negotiate a reduced interest rate. These energy efficient mortgages sometimes referred to as green mortgages are bundled together and sold on the secondary market as green securities. Due to the energy efficient and water conservation upgrades these green securities are 30% less likely to go into default/foreclosure, are in market demand, and sell at a market premium! Green securities lower a lenders portfolio of risk collateral.
Additional benefits include: the VA energy efficient mortgage is assumable to other veterans and the general public. Third parties can take over the initial VA energy efficient mortgage at the below market interest rate! Therefore a lower VA energy efficient mortgage rate can be passed on to a potential new home buyer. This is a huge benefit in the current rising mortgage rate market! All other FHA, Conventional and Freddie Mac mortgages do not offer this extraordinary single benefit! However, there are some restrictions concerning assumable VA mortgages, consult your VA green lender!
For the do-it-yourselfer...
The Do it yourself (DIY) veteran “handyman” can get creative! Using a little ingenuity by purchasing qualified materials at substantial discount prices, performing their own labor, on preapproved green renovations can go a long way on increasing the green appraisal value of a dwelling! The indoor comfort level goes up for the whole family, monthly energy/water utility costs go down, increasing the homes marketability, which is now a relevant factor in new home buyers decision on which certified green home to purchase! Creative Handyman veterans can purchase conventional older “brown” homes, install energy/water upgrades and sell their certified green home at a substantial profit!
VA Energy Efficient Mortgage Guarantee
Typical FHA Energy mortgage financing requires a 3.5% down payment and private mortgage insurance. The private mortgage insurance(PMI) protects the lender in case of borrower default. However qualified veterans can receive 100% financing and pay no private mortgage insurance on a VA energy efficient mortgage!
This VA benefit is accomplished by the veteran receiving the basic entitlement of $36,000 The VA lender multiples the basic entitlement four times to $144,000 which is the amount the VA lender is guaranteed and willing to fund. This in theory results in a 25% guaranteed down payment by the borrower. This is how the VA borrower is able to obtain 100% financing with no down payment and not be required to pay private mortgage insurance (PMI) on VA Energy Efficient Mortgages (VAEEM).
The VA still guarantees 25% of the loan amount
$144,000 home is todays market? Not enough? The VA administration realized this. Therefore in order to stay competitive nationally the VA linked its loan limit to correspond to Fannie Mae and Freddie Mac conventional limits which range from $417,000 to $625,000. The VA still guarantees 25% of the loan amount. In higher priced states such as: New York, California, Hawaii and Virginia the limit is $729,500. No down payment or PMI required!
VA energy efficient mortgage borrowers have no loan limit. However there are underwriting restrictions. Residual income is the discretionary income after the homeowner has paid all their monthly credit obligations. Discretionary income is determined by the number of people living in the household, and the cost of living in the local geographical area of the country. VA lenders have an underwriting table to adhere to be eligible to receive the 25% VA home loan guarantee.
Debt to Income ratio(D/I). This cornerstone ratio is one of the foundations of the VA energy efficient mortgage green underwriting criteria. The home borrowers total monthly income is divided by the amount of monthly debt. A figure of 20% is considered to be a low risk. Anything over 40% is considered to be a high risk. The VA energy efficient mortgage allows up to 41% debt to income for the maximum ratio allowed for qualified military veterans. Certain exemptions can be granted.
Credit score. Typically VA lenders are looking for a FICO credit score of 620. However every VA lender is different and lower scores into the 500’s are still possible. The VA lender is required to review the entire VA energy efficient mortgage package. There are compensating factors such as debt to income, loan to value and residual income. Each VA lender uses an overlay and lender desecration is a consideration. Market competition between VA lenders is also a factor to consider! If you are declined by one VA lender there are still many VA lenders you can shop your VA energy efficient mortgage to!
Loan to value ratio
Loan to Value ratio. Most of the time the VA energy efficient mortgage is 100% financing. However there are exceptions. If you purchase a home in a high income area of the country. You would be required to put down a certain percent to qualify. Other exceptions could be, if you refinance, or combine your VA eligibility with more than one dwelling.
Over eighty five percent (85%) of veterans purchased their home through a conventional real estate broker. Veterans may want to consider contacting a greenbroker for legal representation buying and selling their green renovated home. They are knowledgeable in energy/water efficient green construction features. After the VA veteran performs energy efficient upgrades financed by the VA energy efficient mortgage to a conventional home. These additional new green renovation upgrades can be properly explained, documented in the green appraisal and showcased to the next potential sustainable home buyer offering an assumable VA energy efficient mortgage!
Implementing the triad green premium expertise of the Green broker, green appraiser and green lender. The astute homeowner could increase their green “assets” which may include extraneous expenditures such As; flood insurance, fire insurance, sea level rise, and climate risk,
Monthly VA energy efficient mortgage payments combine the annual principal, interest, taxes and insurance divided into 12 equal monthly payments. The principal amount becomes reduced every year on a sliding scale. You can receive a print out annually from your Va lender. However the amount paid for homeowners insurance and taxes can vary from year to year. Homeowners can shop for a more competitive homeowners insurance policy combing their auto insurance which can effect their annual/monthly premium.
Of specific interest to veterans is the residential annual taxes on their residential property. Every state has a separate tax policy for veterans. Depending on the individual state and the veteran’s percentage of disability. Each state may offer a percentage of reduction on your annual residential tax rate. This could range all the way up to a 100% tax wavier! This is a big deal and a real advantage to disabled veterans! Few veterans even know about this residential tax wavier. Consult your local taxing authority for you eligible deduction and submit your disability paper to the tax assessor. Bingo if there is a reduction available once again your monthly payments goes down over the lifetime of your VA energy efficient mortgage!
For example: a $6,000 annual tax bill results in a $500.00 monthly escrow amount. For a 100% disable veteran, even if you are still able to work, in a 100% veteran wavier tax district would result in a $500 dollar lower monthly payment! Over 30 years this equals $180,000 dollars! Just a little investigation and paperwork submitted to the local tax assessor could result in this type of savings to your family!
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