October 6, 1995
MORTGAGEE LETTER 95-46
TO: ALL APPROVED MORTGAGEES
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
.