FHA 203K EEM
FHA Energy Efficient 203(k) Explained
FHA's Energy Efficient (EEM) 203(k) loan has numerous options and benefits for homeowners; therefore, the FHA 203(k) Energy program is becoming an increasingly popular choice.
This particular FHA mortgages program grants homeowners’ access to energy-efficient upgrades that can help save money on their electricity bills while aiding in reducing carbon emissions.
What is the FHA 203(K) Energy Efficient Mortgage Loan?
The FHA loan 203(k) Energy program offers homeowners the ability to make energy efficient updates to their homes.
It is a special program offered through the Federal Housing Administration. FHA 203(k) loan program is designed specifically for homeowners who want to make energy-efficient upgrades to the home they are buying or already own.
This loan program allows homeowners to borrow money for both the purchase of a new home and the cost of energy-efficient upgrades in a single loan or refinance an existing home and make upgrades.
The program is administered by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing and Urban Development (HUD).
FHA is a government agency committed to offering these types of programs. Their goal is to make homeownership more accessible to all Americans.
How does the FHA 203(k) Energy Efficient loan program work?
The FHA 203(k) Energy Programs allows homeowners to have access to a single loan for both purchasing their new home and making energy-efficient upgrades or refinancing and upgrading at the same time.
Homeowners will need to work with an approved lender who offers both FHA loans and FHA 203(k) loans. The lender will assess their eligibility for mortgage based on the value of their house as well as the cost of improving its efficiency through upgrades significant repairs and improvements.
Upon approval of the loan, the funds will be disbursed in two separate payments. The first payment will be used to purchase the home or pay off the existing mortgage, while the second payment will be held in escrow until the energy-efficient upgrades have been completed.
Once the upgrades have been completed, the homeowner will need to provide proof of completion to the lender. The lender will then release the funds from escrow to pay for the cost of the upgrades and improvements.
The cost of the improvements that may be eligible for financing as part of the mortgage is the lesser of 5 percent of the property's value, 115% of the median area price of a single-family dwelling or 150% of the conforming Freddie Mac Limit. The lender will be able to review current FHA 203 (K) Energy loan limits.
If energy-efficient improvements are found to be cost effective, the homeowner may have the option of adding their costs onto their mortgage.
The limit of the additional cost of energy efficient improvements may not exceed 5 percent of your property's value or $4,000 - whichever is higher based on the worth of your home.
What are some of the Eligible Energy-Efficient upgrades eligible for FHA 203(K) Energy Loan?
The FHA 203(k) Energy program allows homeowners to make a wide variety of energy-efficient upgrades to their homes. The homeowner will need to work with their lender on specific upgrades.
A few examples include:
- Replacing air conditioning (HVAC) and heating systems
- Installing solar systems, replacing windows and doors to energy-efficient products
- Replacing ranges, washer and dryers, and refrigerators with energy efficient ones.
- Installing an energy efficient water heater, energy star products
- Improving or repairing any health or safety issues
- Upgrading insulation in the attic, walls, and floors
- Installing a new roof
What home improvements are not eligible with an FHA 203(K) Energy Loan?
Luxury improvements are not eligible for an FHA 203K Energy Loan. In general, if an improvement does not upgrade the actual functioning of the home, it will not be eligible for an FHA 203(K) Energy Loan.
We have listed a few examples below.
- Swimming pools
- Hot tubs
- Outdoor fireplace
- Barbeque Pit
- Satellite dish
- Coops
- Residential and Commercial combined property
- Investment properties
Who is eligible for a FHA 203(k) Energy Efficient Mortgage?
To be eligible for the FHA 203(k) Energy program, homeowners must meet the following FHA Requirements for Eligibility. A summary is provided below:
Credit Score:
The homeowner’s credit score must be at least 500 or more. A credit score of less than 580 will required a 10% down payment. A homeowner with a credit score of 580 or more requires a 3.5% down payment. (FHA 203K requirements)
Debt to Income Ratio (DTI):
The debt to income (DTI) ratios needs to be 50% or lower.
Additional criteria:
- The home must meet the requirements for FHA eligible home, one- to four-unit property.
- The homeowner must live in the home as their primary residence.
- The homeowner must meet the FHA's credit and income requirements.
- Maximum loan amounts are generally capped at $472,030 in low-cost counties. A loan for a single-family home in a high-cost county is $1,089,300.
- The homeowner may not have had a foreclosure in the last 3 years.
What Documentation is Required for FHA 203(K) Energy Loan?
Below is an example of the documentation the homeowner will need when applying for an FHA 203(K) home loan:
- Valid government-issued ID, such as a driver's license or passport.
- Proof of a Social Security number.
- 2 Years W2's or Tax Returns
- 1 month most recent pay-stubs
- Sales Contract (if purchase)
- Real Estate Appraisal
- Contractor Bids, or Proposals
What are the pros and cons of FHA 203(k) Energy Efficient Loans?
It is important for a homeowner to understand the pros and cons before selecting an FHA 203(k) loan. The FHA 203 (k) offers a variety of valuable benefits, but there also are risks involved.
Advantages or pros:
- Lower credit score and down payment requirements
- Can provide temporary housing while a home is being repaired
- Smaller interest rates than other loan types
- Ability mortgage lenders to combine home purchase and renovations into single loan
- Low down payment and minimum credit score and requirements
Disadvantages or cons:
- Application process can take a lot of time and paperwork to complete.
- FHA 203(k) loans cannot be used for an investment property.
- Mortgage insurance is required.
- Projects may require you to hire and work with a HUD consultant.
- Property has to be primary residence.
Conclusion Energy Efficient Mortgage Loans:
FHA 203k loans are a type of mortgage loan backed by the Federal Housing Administration (FHA) that allows borrowers to finance the purchase or refinance of a property along with the cost of its renovation or rehabilitation.
These loans can be a great option for low down payment and for homebuyers looking to purchase a fixer-upper or homeowners looking to renovate their existing home.
The FHA 203k loan program offers two types of loans: the Standard 203k and the Streamline 203k.
The Standard 203k is designed for more extensive renovations and requires the use of a HUD consultant to oversee the construction process.
The Streamline 203k, on the other hand, is designed for less extensive renovations and does not require a HUD consultant.
In summary, FHA 203k loans can be a great option for homebuyers or homeowners looking to finance the purchase or renovation of a property.
However, borrowers should carefully weigh the advantages and disadvantages of these loans before making a decision, and work with a knowledgeable lender to ensure they are getting the best possible the loan terms ever.
If you have additional questions about the FHA Mortgage programs or FHA 203 K give us a call.
Our expert mortgage officers are available to assist..
Please call us at 1-866-713-9292.
