VA Underwriting Guidelines 

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Energy Efficient Mortgages

Energy efficient mortgages, EEMs, are intended to improve a residence owned and occupied by the veteran as the veteran's home through the installation of a solar heating system, a solar heating and cooling system, or a combined solar heating and cooling system, or through the application of a residential energy conservation measure. These energy efficiency improvement loans can be made in conjunction with any type of VA purchase or refinancing loan. 

Acceptable Energy Efficiency improvements include, but are not limited to:

  • 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. 
  • Storm windows and/or doors, including thermal windows and/or doors. 
  • Heat pumps, and Vapor barriers. 

Requirements:

Funds for energy efficiency improvements are considered part of the total loan, which must be secured by a first lien.  If the labor is to be performed by the veteran, the loan increase will be limited to the amount necessary to pay for materials. 

A loan for existing property may be increased by up to $6,000 for energy efficiency improvements at the option of the lender and veteran at any time up to closing without VA's prior approval. 

The lender must determine that the proposed weatherization and/or energy conservation improvements are reasonable for the particular property. 
The lender must evaluate the veteran's ability to pay the increased loan payments caused by addition of energy efficiency improvements. 

For energy efficiency improvements that will increase a loan amount by more than $6,000, the amount of the increase must be supported by an increased valuation in an equal amount. 

Borrower Notice on the NOV

Information on an Energy Efficiency Mortgage is provided to a veteran who applies for a loan which requires a NOV (that is, a loan for a home purchase or cash-out refinance). The NOV includes the following notice to the veteran: 

"The buyer may wish to contact a qualified person/firm for a home energy 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 considered." 

The mortgage may be increased by: 

  • UP to $3,000 based solely on the documented costs. 
  • Up to $6,000 provided the increase in monthly mortgage payment does not exceed the likely reduction in monthly utility costs, or 
  • More than $6,000 subject to a value determination by VA. 

Underwriting Considerations

Energy efficiency improvements up to $3,000: The resulting increase in loan payments will normally be offset by a reduction in utility costs. 

Energy efficiency improvements more than $3,000, up to $6,000:  The lender must make a determination that the increase in monthly mortgage payments does not exceed the likely reduction in monthly utility costs. The underwriter should rely on locally available information provided by utility companies, municipalities, state agencies or other reliable sources, and document the determination. 

Energy efficiency improvements of $6,000: Lenders should exercise discretion and consider whether the increase in monthly mortgage payments exceeds the likely reduction in monthly utility costs, and whether the veteran's income is sufficient to cover the high loan payment. 

A VA Certificate of Commitment issued before the decision to make energy efficiency improvements over $6,000 must be returned to VA for a determination that the applicant still qualifies.

Energy Efficiency Improvements in Conjunction with an IRRRL

If the monthly payment (PITI) for the new loan exceeds the PITI of the loan being refinanced by 20% or more, the lender must certify to having determined that the veteran qualified for the higher payment.

How to Calculate Guaranty and Entitlement Use

Guaranty is calculated on an energy efficient mortgage as described below. 

  1. Calculate guaranty on the loan without the portion attributable to the energy efficiency improvements.
  2. Calculate guaranty on the energy efficiency improvements portion by applying the same percentage used in Step 1.
  3. Add the results of Steps 1 and 2 to arrive at guaranty on the entire loan.

However, the veteran's entitlement will only be charged the amount arrived at in Step 1; that is, based upon the loan amount before adding the cost of the energy efficiency improvements.

Calculate the funding fee based on the full loan amount including the cost of the energy efficiency improvements.

 

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