October 6, 1995

                                  MORTGAGEE LETTER 95-46


SUBJECT: Single Family Loan Production - Expansion of the Energy

          Efficient Mortgage Program

      On May 24, 1993, the Department implemented the FHA Energy

EfficientMortgage (EEM) Pilot Program for existing one and two-unit

properties in the followingstates: Alaska, Arkansas, California,

Vermont, and Virginia.  The Department is nowexpanding the EEM

Program nationwide, and includes new construction in compliancewith

Section 513 of the Housing and Community Development Act of 1992. 

Thedetailed program requirements, processing instructions and

underwriting procedures forthe EEM Program remain the same as those

set forth in Mortgagee Letter 93-13(attached).  The only

modifications to Mortgagee Letter 93-13 are that both

203(k)Rehabilitation Mortgages and Adjustable Rate Mortgages are

now allowable under theEEM Program, and that new as well as

existing construction is included.  The expansionof the EEM Program

is effective immediately.

      An EEM recognizes the energy savings of a home that has "cost

effective" energysaving improvements that increase the energy

efficiency of a home.  Because the home isenergy efficient, the

family will save on utility costs and thereby can afford to

devotemore of its income to the monthly mortgage payment.  Energy

efficiency improvements can include both energy saving equipment

and active and passive solar technologies.

     Under the FHA EEM Program, a borrower can finance into the

mortgage 100 percent of the cost of eligible energy efficient

improvements, subject to certain dollarlimitations, without an

appraisal of the energy improvements and without further credit

qualification of the borrower.

      To be eligible for inclusion into the mortgage, the energy

efficient improvementsmust be "cost effective," i.e., the total

cost of the improvements (including maintenancecosts) must be less

than the total present value of the energy saved over the useful

life of the improvements.  The mortgage includes the cost of the

energy efficient improvements in addition to the usual mortgage

amount permitted by regulations.  The FHA maximum loan limit for

the area may be exceeded by the cost of the eligible energy

efficient improvements.  The cost of the energy improvements and

the estimate of the energy savings must be determined based upon a

physical inspection of the property by anaccredited home energy

rating system (HERS) or qualified energy consultant.  

     For new construction, the energy improvements must be over and

above those required for compliance with the current FHA energy

conservation standards for new construction.  The estimate of the

energy savings in new construction must be basedupon a comparison

of plans and specifications of the house with the additional energy

saving improvements to those of the basic house which complies with

the current FHA energy conservation standards.  Presently, these

standards are those of the CABO 1992 Model Energy Code (MEC).     

    In order to obtain a more accurate estimate of the cost savings

for each improvement, an alternative Energy Efficient Mortgage

Worksheet (Attachment B to Mortgagee Letter 93-13) has been

created.  The new worksheet (Attachment B1) includes an Energy

Efficient Premium Table which allows each eligible improvement to

be assigned its own useful life.  The optional worksheet is

attached and can be used as an alternative to Attachment B of

Mortgagee Letter 93-13.

        Please note that the program disclosure statement

requirement has changed.  The program no longer requires that all

applicable borrowers receive a separate Disclosure Statement

informing them of the FHA EEM program.  Instead, at the next

revision,language will be added to the FHA disclosure notice,

Important Notice to Homebuyers. Realizing the importance of some

form of disclosure notice, lenders are requested to use alternative

methods of informing potential homebuyers of the EEM Program.  As

a temporary substitute, lenders may use the attached FHA Fact Sheet

as a disclosure statement. If you have any questions concerning

this Mortgagee Letter, please contact the local HUD Office. 


Sincerely yours,   

Nicolas P. Retsinas 

 Assistant Secretary for Housing-

 Federal Housing Commissioner