source:
  type: guide
  id: va-m26-7-ch07-t03
  authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 3 — Energy Efficient
    Mortgages
  description: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 3 — Energy
    Efficient Mortgages.
  coverage_tier: operative
obligations:
- id: va-m26-7-ch07-t03-full
  canonical_id: va-m26-7-ch07-t03-full
  section: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 3 — Energy Efficient
    Mortgages
  type: do
  tags:
  - regulator-direct
  - va
  - va-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 7, Topic 3 — Energy
      Efficient Mortgages
    source_class: va-handbook
    source_url: https://www.benefits.va.gov/warms/pam26_7.asp
    snapshot_id: 0e2735cf8ca44400
    fetched_at: '2026-05-23T01:53:53Z'
    content_hash: sha256:74297ad4fadd5e592b5688f5567170f8c128f7c9749dd06edd59e735a69099d8
    paragraph_quote: '3. Energy Efficient Mortgages Change Date March 11, 2019 • This
      chapter has been revised in its entirety. a. What are EEMs? Energy Efficient
      Mortgages (EEMs) are loans to cover the cost of making energy efficiency improvements
      to a dwelling. They can be made in conjunction with a: • VA loan for the purchase
      of an existing dwelling, or • VA refinancing loan secured by the dwelling. 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;
      • water heater insulation; • storm windows and/or doors, including thermal windows
      and/or doors; • heat pumps; and • vapor barriers. b. Borrower Notice on the
      NOV Information on EEMs is provided to a Veteran who applies for a loan which
      requires an NOV (a loan for a home purchase or regular “cash-out” refinance).
      The NOV includes the following notice to the Veteran: Continued on next page
      VA Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty,
      and Other Considerations 7-18 3. Energy Efficient Mortgages, continued b. Borrower
      Notice on the NOV, continued “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 • VA does not permit EEMs more than $6,000 (38
      U.S.C. §3710(d)). c. 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,
      and must rely on locally available information provided by utility companies,
      municipalities, state agencies or other reliable sources, and document the determination.
      Energy efficiency improvements in conjunction with an Interest Rate Reduction
      Refinancing Loan (IRRRL). If the monthly payment (Principal, Interest, Taxes,
      and Insurance (PITI)) for the new loan exceeds the PITI of the loan being refinanced
      by 20 percent or more, the lender must certify to having determined that the
      Veteran qualified for the higher payment. Continued on next page VA Pamphlet
      26-7 Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty, and
      Other Considerations 7-19 3. Energy Efficient Mortgages, continued d. Documentation
      Required with Closed Loan Package Energy efficiency improvements up to $3,000:
      Evidence of the cost of improvements such as a copy of the bid(s) or contract
      itemizing the improvements and their cost. Improvements more than $3,000, up
      to $6,000: Evidence of the cost of improvements such as a copy of the bid(s)
      or contract itemizing the improvements and their cost, and the lender’s determination
      that the increase in monthly mortgage payments does not exceed the likely reduction
      in monthly utility costs. IRRRL with significant increase in payments: If the
      cost of the improvements cause the new loan payment (PITI) to be 20 percent
      or higher than the old payment (on the loan being refinanced), then include
      the lender’s certification that it has determined that the Veteran qualified
      for the higher payment. Continued on next page VA Pamphlet 26-7 Revised Chapter
      7: Loans Requiring Special Underwriting, Guaranty, and Other Considerations
      7-20 3. Energy Efficient Mortgages, continued e. How to Calculate Guaranty and
      Entitlement Use? Guaranty is calculated on an EEM as described in the following
      table. Step Action 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; it is based upon the loan amount before adding the cost of the energy efficiency
      improvements. Example 1: If a Veteran has full entitlement and applies for a
      loan of $80,000, plus $6,000 in energy efficiency improvements, VA will guarantee
      40 percent of the full loan amount of $86,000. Thus, the dollar amount of the
      guaranty will be $34,400, even though the charge to the Veteran’s entitlement
      is only $32,000. Example 2: If a Veteran with full entitlement applies for a
      $144,000 loan to purchase a home, and adds $6,000 in energy efficiency improvements,
      the 25 percent guaranty on the loan will only require the use of $36,000 entitlement,
      but the dollar amount of guaranty will be $37,500. f. How to Calculate the Funding
      Fee Calculate the funding fee based on the full loan amount including the cost
      of the energy efficiency improvements. Continued on next page VA Pamphlet 26-7
      Revised Chapter 7: Loans Requiring Special Underwriting, Guaranty, and Other
      Considerations 7-21 3. Energy Efficient Mortgages, continued g. Improvements
      Not Completed Before Closing If the energy efficiency improvements are not completed
      before closing, the lender may establish an escrow and close the loan. • A formal
      escrow is not required. • Only the amount needed to complete the improvements
      must be withheld. Check the appropriate block in item 23, VA Form 26-1820, Report
      and Certification of Loan Disbursement. • No additional documentation concerning
      the escrowed/earmarked funds must be submitted when reporting the closed loan.
      Generally, the improvements should be completed within 6 months from the date
      of loan closing. Provide written notification to VA when improvements are completed
      and the escrow funds are disbursed. Escrow requirements concerning completion
      of improvements are listed in Chapter 9 of this handbook. • Assure the funds
      are properly applied to the costs of improvements. If, after a reasonable time,
      the lender determines that the improvements will not be completed: • Apply the
      balance of the escrowed/earmarked funds to reduce the principal balance on the
      loan, and • Provide written notification to VA that this has been done. Continued
      on next page VA Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special Underwriting,
      Guaranty, and Other Considerations 7-22 3. Energy Efficient Mortgages, continued
      h. Reimburseme- nt to the Veteran out of IRRRL Proceeds The Veteran generally
      may not obtain cash proceeds from an IRRRL. There is one exception. Up to $6,000
      of IRRRL loan proceeds may be used to reimburse the Veteran for the cost of
      energy efficiency improvements completed within the 90 days immediately preceding
      the date of the loan. VA Pamphlet 26-7 Revised Chapter 7: Loans Requiring Special
      Underwriting, Guaranty, and Other Considerations 7-23'
  judgment: false
