FHA Loan Types

1. FHA Loan Types Chapter 2

2. Chapter 2: FHA Loan Types Introduction • To perform FHA appraisals, appraisers must gain placement on the FHA Appraiser Roster. There are several steps that must be taken to obtain placement on this roster. • There are also many different FHA mortgages available to different types of properties and borrowers.

3. Chapter 2: FHA Loan Types Key Terms • FHA Appraiser Roster The roster maintained by the FHA that lists eligible appraisers. Appraisers on the list must have met the criteria, applied, and kept their information on the roster current. • Fannie Mae (Federal National Mortgage Association) A federally chartered institution that functions as a buyer and seller of savings and loan residential mortgages.

4. Chapter 2: FHA Loan Types Key Terms • Mortgagee A lender who accepts a mortgage as security for repayment of a loan. • Mortgagor The borrower who gives a mortgage to a lender as security for a loan. • Reverse Mortgage Used when a qualified senior mortgages his or her principal residence to a lender and, in return, receives an income stream from the lender. The borrower must have substantial equity in the home for this option to be viable. The mortgage is repaid when the home is sold or the borrower dies.

5. Chapter 2: FHA Loan Types The FHA Appraiser Roster • Lists those appraisers who have satisfied the requirements to become certified to perform FHA appraisals and is maintained by HUD. • Lenders underwriting FHA loans may accept only appraisals from appraisers who are on this roster.

6. Chapter 2: FHA Loan Types Eligibility to Perform FHA Appraisals • Appraisers seeking eligibility for FHA Appraiser Roster placement must: • Be a Residential or General State-Certified appraiser with credentials based on the minimum certification criteria issued by the Appraiser Qualifications Board (AQB) of the Appraisal Foundation. Licensed appraisers are ineligible. • Agree, as an appraiser, that you have read and understand the FHA 4150.2 manual, and understand you must obtain and read all HUD updates. • Not be listed on the General Service Administration (GSA) Excluded Parties List System (EPLS), HUD’s Limited Denial of Participation List (LDP), or HUD’s Credit Alert Interactive Voice Response System (CAIVRS).

7. Chapter 2: FHA Loan Types Procedure to Obtain Placement on the Appraiser Roster • Read the eligibility requirements • Submit applications online • Appraisers once on the roster must apply for reinstatement • You must fill-in and print the form HUD-92563 from the FHA Connection (FHAC), sign, scan, and save it in PDF format. PDF is the only acceptable file format • You must have your current paper state-issued certification scanned and saved in PDF format to upload in the required area of FHAC

8. Chapter 2: FHA Loan Types Procedure to Obtain Placement on the Appraiser Roster (cont.) • Review and verify your personal information on the National Registry. • Note the number shown in the “Lic. Number” field and the certification “Type.” After completing the online application, the state-issued number must be entered into the FHA Connection as it appears in the National Registry. Inexact matches will result in error messages that will prevent you from finishing the application. • If your information needs to be corrected on the National Registry, you must ask your state appraisal regulatory agency to resend your information to the registry. If your information is incorrect or if you are not listed on the National Registry as USPAP-compliant you may need to wait one business day before beginning the FHA application.

9. Chapter 2: FHA Loan Types Completing the Application • Visit the FHA Connection at: https://entp.hud.gov/idapp/html/f17apr-application.cfm • Complete the application using the information gathered during the preparation phase. Enter your state-issued number into the FHA Connection exactly as it appears in the National Registry • Prior to processing the application, you will be prompted to read and agree to the Appraiser Certification statement at the bottom of the application.

10. Chapter 2: FHA Loan Types Processing the Application • Send the application to process it. • Generate the application and upload files. Print the instructions. • Generate and print the Application for Fee or Roster Personnel Designation, form HUD 92563. The form will auto-generate based on the information provided on the FHA Appraiser Roster Application page. • Sign the Application for Fee or Roster Personnel Designation, form HUD-92563. Scan all application pages into one PDF file. Save all three pages of the scanned form into the file prior to uploading. • Scan each state certification into a PDF file. • Attach and upload the PDF files containing the scanned application and certification(s).

11. Chapter 2: FHA Loan Types Once the Application Has Been Accepted • Once an appraiser is listed on the roster, he may begin to conduct appraisals for FHA insured loans. • FHA Roster Appraisers must ensure FHA compliance by: • Reviewing all policies and procedures in FHA’s guidance and policy documents. • Attending a training session. • Reviewing frequently asked questions in the HUD National Homeownership Center Reference Guide. • Knowing how to receive help. Contact the FHA Resource Center or the Homeownership Center with questions.

12. Chapter 2: FHA Loan Types Updating Information and Renewing a Certification • FHA Roster Appraisers must keep their personal and business information up-to-date via the FHA Connection and establish an FHAC user ID. • To apply for an FHAC User ID, FHA Roster Appraisers must: • Go to the FHA Connection at https://entp.hud.gov/clas/ • Select Registering a New User in the Getting Started Section. • Select Appraiser Registration in the FHA-approved Appraiser section. • Complete the Appraiser Registration page and send.

13. Chapter 2: FHA Loan Types Updating Information and Renewing a Certification (cont.) • To update contact information once an FHAC User ID has been established: • Go to the FHA Connection at https://entp.hud.gov/clas/ • Select ID Maintenance from the menu bar at the top of the page. • Select Appraiser Roster. • Change your information as needed and select Send. • After updating, you can attach the PDF version of your state-issued certification. The ability to upload a scanned copy appears only if you change the expiration date, or you add a state certification that is not already listed.

14. Chapter 2: FHA Loan Types Possible Reasons for Removal from the Roster • Significant deficiencies in the appraisal, including non-compliance with Civil Rights requirements • Losing standing as a state-certified appraiser due to disciplinary action in any state where the appraiser is certified • Prosecution for committing, attempting to commit, or conspiring to commit fraud, misrepresentation, or other offenses that may reflect on the appraiser’s character or integrity • Failure to perform appraisal functions in accordance with standards issued by HUD

15. Chapter 2: FHA Loan Types Possible Reasons for Removal from the Roster (cont.) • Failure to comply with any agreement between HUD and the appraiser, or with any certification made by the appraiser • Being issued a final debarment, suspension, or limited denial of participation • Failure to maintain eligibility requirements for placement on the FHA Appraiser Roster • Failure to comply with HUD-imposed or other education requirements

16. Chapter 2: FHA Loan Types Reinstatement • Roster appraisers who were previously on the roster, cannot apply as a “new applicant,” but may qualify for replacement. • An appraiser who was once on the roster but whose record is no longer found will have a “terminated” status. To be reinstated, he must meet the minimum eligibility requirements. • To reinstate his status on the roster, the appraiser must e-mail a PDF version of his state-issued certification to AppraiserRoster@hud.gov and specify “Request for Reinstatement” in the subject line. The request may take up to three weeks to process.

17. Chapter 2: FHA Loan Types FHA Loan Types • 203(b) Mortgage Insurance Program • 203(h) Mortgage Insurance Program for Disaster Victims • 255 Home Equity Conversion Mortgage Program (HECM) Reverse Mortgages for Seniors • 203(k) Rehab Program • 220(d)(3)(A) Urban Renewal Mortgage Insurance Program • EEM (Energy Efficient Mortgages) FHA lenders might not offer all FHA loan programs.

18. Chapter 2: FHA Loan Types 203(b) Mortgage Insurance Program • Assists with the purchase or refinance of a principal residence. • To be eligible for the program, the borrower must: • Meet standard FHA credit qualifications. • Comply with the FHA’s down payment or equity provisions • Purchase a one- to four-unit property. • The borrower can finance the upfront mortgage insurance premium into the mortgage, but is responsible for paying annual premiums.

19. Chapter 2: FHA Loan Types 203(h) Mortgage Insurance Program for Disaster Victims • Allows the FHA to insure mortgages made by qualified lenders to victims of major disasters who are rebuilding a, or purchasing another, home. • Protects lenders against the potential risk of default by borrowers, which may be used to finance the purchase or reconstruction of a single-family home that will be the homeowner’s principal residence.

20. Chapter 2: FHA Loan Types 203(h) Mortgage Insurance Program for Disaster Victims (cont.) • Two-, three-, and four-unit properties are ineligible • No down payment is required • Closing costs and prepaid expenses must be paid by the borrower in cash or premium pricing if not paid by the seller. • The borrower’s application must be submitted within one year of the president’s declaration of disaster.

21. Chapter 2: FHA Loan Types Reverse Mortgages for Seniors—255 Home Equity Conversion Mortgage Program (HECM) • Used by senior homeowners, age 62 and older to convert the equity in their home into monthly income streams and/or a line of credit to be repaid when they no longer occupy the home. • Reverse Mortgages • Occur when a qualified senior mortgages his or her principal residence to a lender and, in return, receives an income stream. • The borrower must have enough equity in the home for this option to be viable. The mortgage is repaid when the home is sold or the borrower dies.

22. Chapter 2: FHA Loan Types Reverse Mortgages for Seniors—255 Home Equity Conversion Mortgage Program (HECM) (cont.) • Borrowers must • Be 62 or older • Own property (single-family, one- to four-unit with one unit occupied by owner, HUD- or FHA-approved condo, PUD, or mobile homes that meet HUD guidelines) • Occupy property as primary residence • Participate in a consumer information session with an HECM counselor • The mortgage amount is based on the age of the youngest borrower, current interest rates, and the appraised value of the property or FHA insurance limit (whichever is less). • No income or credit qualifications are required of the borrower, and no repayment is needed as long as the borrower lives in the property as the primary residence.

23. Chapter 2: FHA Loan Types Reverse Mortgages for Seniors—255 Home Equity Conversion Mortgage Program (HECM) (cont.) • Five Available Payment Options • Tenure: Equal monthly payments as long as one borrower lives and occupies the property as the principal residence. • Term: Equal monthly payments for a fixed period of time. • LineofCredit: Unscheduled payments, varying in time and amount, until the line of credit is used up. • ModifiedTenure: Combination of monthly payments with line of credit as long as the borrower remains in the home. • ModifiedTerm: Combination of monthly payments with line of credit for a borrower-selected fixed period of time.

24. Chapter 2: FHA Loan Types 203(k) Rehab Program • Program for rehabilitation and repair of single-family properties. • Typical mortgages require improvements to be completed before a permanent, long-term mortgage is made. • Homebuyer must secure • Financing to purchase the property • Additional financing for the rehab construction • A permanent mortgage when all work is finished.

25. Chapter 2: FHA Loan Types 203(k) Rehab Program (cont.) • Borrowers can receive one mortgage loan, at a long-term fixed or adjustable rate, to finance the purchase and rehabilitation of a property. • Mortgage amount is based on the projected value of the property with the work completed (accounts for cost of work) • Mortgage loans through the program are eligible for HUD endorsement as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established.

26. Chapter 2: FHA Loan Types 203(k) Rehab Program: Self-Help Borrowers • For cases where the borrower acts as the general contractor, lenders must make sure the borrower has the time and expertise to complete the rehabilitation work on schedule. • Borrowers performing “self-help” projects must: • Have lender approval • Sign a self-help agreement • Fully understand that construction must be completed within six months of loan closing or a shorter period, as determined by the lender.

27. Chapter 2: FHA Loan Types 203(k) Rehab Program: Eligible Properties • Eligible properties must: • Be one- to four-unit dwellings, completed for at least one year • Comply with local zoning requirements in terms of the number of units • Be demolished homes, or those razed during rehabilitation, are eligible when some of the existing foundation remains in place Note: Cooperative units are not eligible.

28. Chapter 2: FHA Loan Types 203(k) Rehab Program (cont.) • There is a minimum $5,000 requirement for eligible improvements on the existing structure of the property. Minor or cosmetic repairs may be added to the minimum requirement.

29. Chapter 2: FHA Loan Types 203(k) Rehab Program: Eligible Improvements • Structural alterations and reconstruction (e.g., termite damage, chimney repair) • Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances) • Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978) • Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, covered porch) • Reconditioning or replacement of plumbing, heating, air-conditioning, and electrical systems. Installation of new plumbing fixtures is acceptable. • Installation of well and/or septic system. Prior to beginning any other repairs to the property, they must be installed or repaired. A property less than half of an acre with a separate well or septic system or less than an acre with a well and septic system are not acceptable.

30. Chapter 2: FHA Loan Types 203(k) Rehab Program: Eligible Improvements (cont.) • Roofing, gutters, and downspouts • Flooring, tilting, and carpeting • Energy conservation improvements (e.g., steel insulated exterior doors, caulking, weather stripping) • Major landscape work and site improvement. The correction of grading and drainage problems is also acceptable. Tree removal and repair of existing walks and driveways are acceptable it is a safety hazard. • Improvements for accessibility to a disabled person (e.g., remodeling for wheelchair access, lowering cabinets). Related fixtures are eligible, but must be in addition to the $5,000 requirement. • A 203(k) loan may be used to construct a garage; but the new unit must be attached to the existing dwelling, and comply with HUD’s Minimum Property Standards in 24 CFR 200.926d and all codes and ordinances.

31. Chapter 2: FHA Loan Types 203(k) Rehab Program: Required Improvements • Cost Effective Energy Conservation Standards • Addition to Existing Structure. New construction must conform to local codes and HUD Minimum Property Standards. • Rehabilitation of Existing Structure. • Weatherstripping on all doors and windows to reduce infiltration of air when existing weatherstripping is inadequate. • Caulk or seal all openings in exterior walls where cavities have been exposed because of the rehabilitation. Insulate ceiling areas. • Adequately ventilate attic and crawl space areas.

32. Chapter 2: FHA Loan Types 203(k) Rehab Program • Replacement Systems • Heating, ventilating, and air-conditioning system supply and return pipes and ducts running in unconditioned spaces must be insulated. • Heating systems, burners, and air-conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating, or cooling, except to satisfy the manufacturer’s next closest nominal size. • Smoke Detectors • Each sleeping area must be provided with a minimum of one approved, listed, and labeled smoke detector installed adjacent to the sleeping area.

33. Chapter 2: FHA Loan Types 203(k) Rehab Program: Required Appraisals • The appraiser must provide an opinion of the after-improved value of the subject property, and may be directed to provide the “as is” value. • In cases involving required “as is” and after- improved values, the valuation analysis may consist of one or two separate appraisal reports.

34. Chapter 2: FHA Loan Types 203(k) Rehab Program: Required Appraisals (cont.) • “As Is” Value • A separate appraisal may be required to determine the “as is” value. Lenders may decide that an “as is” appraisal is not feasible or necessary. In this instance, the lender may use the contract sales price on a purchase transaction, or the existing debt on a refinance transaction as the “as is” value, when it does not exceed a reasonable estimate of value. • On a refinance transaction, when a large amount of existing debt suggests that the borrower has little or no equity in the property, the lender must obtain a current “as is” appraisal on which to base the estimated “as is” value. The lender should obtain some comparables from a real estate agent/broker to estimate an approximate “as is” value.

35. Chapter 2: FHA Loan Types 203(k) Rehab Program: Required Appraisals (cont.) • Value After Rehabilitation • The expected market value of the property is based on completion of the proposed rehabilitation and/or improvements. • “As is” appraisals are not required for HUD properties and a Direct Endorsement lender may request the release of the outstanding HUD Property Disposition appraisal on the properties to the lender to establish the maximum mortgage for the properties. • The HUD appraisal is considered acceptable for use if: • It is not more than one year old prior to bid acceptance from HUD. • The sales contract price plus the cost of rehabilitation does not exceed 110 percent of the “as repaired value.” • If the HUD appraisal is insufficient, the Direct Endorsement Lender may order another appraisal to assure the market value will be adequate to make the property purchase feasible. • For a HUD property, down payment is 3.5 percent of the accepted bid price of the property and 100 percent financing on all other costs.

36. Chapter 2: FHA Loan Types 203(k) Rehab Program: Recently Acquired Properties • Homebuyers purchasing a property with cash can refinance the property using a 203(k) insured loan within six months of purchase. • Evidence of interim financing is not required. • A copy of the sales contract and the HUD-1 Settlement Statement must be submitted to verify the accepted bid price (“as is” value) of the property and the closing date.

37. Chapter 2: FHA Loan Types 203(k) Rehab Program: Architectural Exhibits • Improvements must comply with HUD’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. • The homebuyer must provide the lender with the appropriate architectural exhibits that clearly show the scope of work to be accomplished. • Plot Plan of the site—Required only if a new addition is being made to the existing structure. It should show the location of the structure(s), walks, etc. It must include finished grade elevations and required flood elevation. • Proposed interior plan of the dwelling—Should show where planning or structural changes (includes dwelling additions) are being considered. • Work write up and cost estimate—Quantity and cost of each item and description of the work for each item must be shown. Transfer the costs to the Draw Request (form HUD-9746-A).

38. Chapter 2: FHA Loan Types 203(k) Rehab Program: Architectural Exhibits (cont.) • Cost estimates must include labor and materials sufficient to complete the work by a contractor. Homebuyers doing their own work cannot eliminate the cost estimate for labor. • The consultant preparing the Work Write Up and cost estimate needs to inspect the property to assure: • There are no rodents, dry rot, termites, or infestation • There are no defects that will affect the health and safety of occupants. • The adequacy of the existing structural, heating, plumbing, electrical, and roofing systems. • The upgrading of thermal protection (where necessary)

39. Chapter 2: FHA Loan Types 203(k) Rehab Program: Definition for Use in the 203(k) Program • Insurance of Advances • A mortgage (prior to rehabilitation) that is a first lien on the property is eligible to be endorsed for insurance following mortgage loan closing, disbursement of the mortgage proceeds, and establishment of the Rehabilitation Escrow Account. • The mortgage proceeds allocated for the rehabilitation will be escrowed at closing in a Rehabilitation Escrow Account. • Rehabilitation Escrow Account • When the loan is closed, the proceeds designated for the rehabilitation are to be placed in an interest-bearing escrow account insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. • The net income earned by the Rehabilitation Escrow Account must be paid to the mortgagor. The method of such payment is subject to agreement between mortgagor and mortgagee. The lender will release escrowed funds on completion of the proposed rehabilitation in accordance with the Work Write Up and the Draw Request (Form HUD-9746, A).

40. Chapter 2: FHA Loan Types 203(k) Rehab Program: Definition for Use in the 203(k) Program • Inspections • The fee inspector is to use the architectural exhibits to determine compliance or non-compliance and if scheduled with a payment, an indication of work completion should also be provided. • Inspectors should use the Draw Request form (Form HUD-9746-A). The first draw cannot be scheduled until the applicable building permits are issued. • Holdback • A 10 percent holdback is required on each release from the Rehabilitation Escrow Account. The total of all holdbacks may be released only after a final inspection of the rehabilitation and issuance of the Final Release Notice. • The lender may retain the holdback for a maximum of 35 days, or the time required by law to file a lien, to ensure no liens are placed on the property.

41. Chapter 2: FHA Loan Types 203(k) Rehab Program: Definition for Use in the 203(k) Program (cont.) • ContingencyReserve • Cost estimates may include a contingency reserve if existing construction is less than 30 years old, or the nature of the work is complex or extensive. • For properties older than 30 years, a contingency reserve must be included with a minimum of 10 percent of the cost of rehabilitation, but may not exceed 20 percent where major remodeling is considered. • A contingency reserve requirement may be waived if the scope of work is well defined/uncomplicated, and the rehabilitation cost is less than $7,500 • A Request for Change Letter must be submitted with the applicable cost estimates. The change can only be accepted, when the lender determines: • It is unlikely that any deficiency that may affect the health and safety of the property will be discovered. • The mortgage will not exceed the appraised value of the property less the statutory investment requirement.

42. Chapter 2: FHA Loan Types 203(k) Rehab Program: Definition for Use in the 203(k) Program (cont.) • Contingency Reserve (cont.) • If the mortgage exceeds the appraised value less the statutory investment, the contingency reserve must be paid down on the mortgage principal. If personal funds were placed in the account, then, the funds would be replaced if there was a remaining account after the Final Release Notice is issued. • If the mortgage is at the maximum mortgage limit for the area or for the particular type of transaction, but a contingency reserve is necessary, the contingency reserve must be placed into an escrow account from other funds of the borrower at closing. If the contingency reserve is not used, the funds in the escrow account will be released after the Final Release Notice is issued.

43. Chapter 2: FHA Loan Types 203(k) Rehab Program: Definition for Use in the 203(k) Program (cont.) • MortgagePaymentReserve • Funds (not to exceed the amount of six mortgage payments) can be included in the cost of rehabilitation to assist a mortgagor when the property is unoccupied during rehabilitation. • The number of mortgage payments cannot exceed the completion time frame required in the Rehabilitation Loan Agreement. • The lender must make the monthly mortgage payments directly from the interest-bearing reserve account. Monies remaining in the reserve account after the Final Release Notice must be applied to the mortgage principal. • Approval of Non-Profit Agencies • Before a non-profit agency can be approved as an eligible mortgagor and obtain the same mortgage amount as Section 203(k) mortgages, it must demonstrate its housing provider experience to HUD and meet requirements described in HUD Handbook 4155.1 REV-4, paragraphs 1-5. • Satisfactory evidence that of the financial capacity to purchase the property must be provided.

44. Chapter 2: FHA Loan Types 203(k) Rehab Program: Maximum Mortgage Amount • The mortgage amount cannot exceed the applicable loan-to-value ratio and maximum dollar amount limitations for similar properties under Section 203(b). The Mortgage Payment Reserve is a part of the cost of rehabilitation for determining the maximum mortgage amount. • Maximum Mortgage Calculation • The value is defined as the lesser of: • The “as is” property value before rehabilitation plus the cost of rehabilitation; or • 110 percent of the expected market value of the property on completion of the work. • Principal Residence and HUD-Approved Non-Profit Organization • For purchases with 203(k) financing, the maximum mortgage amount is based on the HUD estimate of value in #1 or #2 above, less the statutory investment requirement. • For refinances under the 203(k) Program, the maximum mortgage amount is to be based upon 97/95/90 percent of the HUD estimate of value in #1 or #2.

45. Chapter 2: FHA Loan Types 203(k) Rehab Program: Maximum Mortgage Amount (cont.) • Cost of Rehabilitation • Expenses eligible for inclusion in the cost of rehabilitation are materials, labor, contingency reserve, overhead and construction profit, up to six months of mortgage payments, plus expenses related to the rehabilitation. • The cost of rehabilitation may include the supplemental origination fee, which the mortgagor is permitted to pay when the mortgage involves insurance of advances and discounts that the mortgagor will pay on the mortgage proceeds allocated to the rehabilitation. • Appraisal Fee • The lender may charge a borrower no more than the amount the lender pays the appraiser. The lender may include the appraisal fee in the closing costs.

46. Chapter 2: FHA Loan Types 220 Urban Renewal Mortgage Insurance Program • The FHA Urban Renewal Program insures lenders against losses on mortgage loans used to rehabilitate up to 11 unit, multi-family dwellings or build new ones in redevelopment areas. • Similar to FHA’s basic 203(b) Program, but limited to: • Urban renewal or code enforcement areas. • Areas designated by the local government for concentrated housing, physical development, and public service activities under a locally developed full strategy to upgrade and stabilize the area.

47. Chapter 2: FHA Loan Types 220 Urban Renewal Mortgage Insurance Program (cont.) • These insured mortgages may be used to finance construction or rehabilitation of detached, row, walk-up, elevator-type rental housing, etc. or to finance the purchase of (public agency) rehabilitated properties. • Properties must have two or more units and be in an urban renewal area, urban development project, code enforcement program area, urban area receiving rehabilitation assistance as a result of natural disaster, or where concentrated housing, physical development, or public service activities exist. • The program’s mortgage limits may vary according to size of the unit, type of structure, and location of the project. • The maximum amount of the mortgage loan may not exceed 90 percent of the estimated replacement cost for new construction. • For substantial rehabilitation projects, the maximum mortgage amount is 90 percent of the estimated cost of repair and rehabilitation and the estimated value of the property before the rehabilitation project.

48. Chapter 2: FHA Loan Types Energy Efficient Mortgages (EEMs) • EEMs are mortgages offered by HUD which take into account the energy costs of the house, and allow the borrower to extend their debt to income ratios to take into account the lower energy costs. • These loans require a HERS (Home Energy Rating Service) rating. HERS ratings are based on a benchmark of 100. The lower the HERS rating, the more efficient the house is in respect to energy. • Zero net energy homes, those which create all the energy they use, have a HERS rating of 0. • EEMs can be used to finance energy improvements up to 10 percent of the appraised value. The FHA lender must receive a copy of the energy report. An escrow account should be set up, the work monitored, and funds disbursed, as it is completed. The work must be completed within 180 days of loan closing. • The appraiser must determine the “as complete” value of the property, with the energy improvements, and verify (with photographs) its completion.

49. Chapter 2: FHA Loan Types Energy Efficient Mortgages (EEMs) (cont.) • The cost of the energy improvements may be added to the sales price for purchase transaction. A HERS report is required, and must be completed no earlier than 120 days before loan closing. • If any funds are left in the escrow account after the work is done, these must be used for principal reduction on the loan. • An energy improvement feature, per Fannie Mae, is designed to provide sustainable funding for improvements to lower homeowner costs through energy efficiency.

50. Chapter 2: FHA Loan Types EEMs and Buyer’s Borrowing Power Energy Efficient Home (200 IECC)* *Interest rate 4 percent, down payment of 10 percent, 30-year term, principal & interest only (tax & insurance not factored). Sample same as provided on HUD.gov website, with calculations based on and interest rate changed to 4 percent.