Quick Answer: What is an Energy-Efficient Mortgage?
An Energy-Efficient Mortgage (EEM) allows you to finance cost-effective energy improvements as part of your home purchase or refinance - without increasing your down payment requirement.
FHA EEM: Borrow up to 15% extra of your home's value for energy upgrades like solar panels, insulation, HVAC, windows. On a $700,000 home, finance up to $105,000 in improvements ($805,000 total loan) with just 3.5% down on the base price.
NJ Clean Energy Incentives: Get up to $4,000/home in rebates for comprehensive energy upgrades, plus 30% federal solar tax credit. Example: $70K in improvements → $12K back in incentives → $58K effective cost financed at your mortgage rate.
How FHA Energy-Efficient Mortgages Work
The FHA Energy Efficient Mortgage program lets you roll the cost of energy improvements into your home loan, paying for upgrades over 30 years at your mortgage rate instead of paying cash upfront or taking a high-interest home equity loan.
Borrowing Limits for Energy Improvements
You can borrow the lesser of:
- 15% of the as-improved home value (with energy assessment)
- OR the actual cost of improvements
- OR 5% of property value up to $6,000 (without formal assessment)
$500,000 home: Up to $75,000 in energy improvements
$700,000 home: Up to $105,000 in energy improvements
$1,000,000 home: Up to $150,000 in energy improvements
Down Payment Advantage
Your down payment is calculated on the base home price only, not including the energy improvements.
Example: $700K Home + $70K Improvements
- Total Loan: $770,000 ($700K home + $70K improvements)
- Down Payment Required: $24,500 (3.5% of $700K base price only)
- You Finance: $745,500 ($721K base loan + $24.5K from down payment allocation + $70K improvements)
- Benefit: You DON'T need 3.5% down on the improvements ($2,450 savings)
Eligible Energy Improvements
Heating & Cooling
- High-efficiency furnaces (95%+ AFUE)
- Heat pumps (SEER 16+)
- Central AC upgrades
- Ductless mini-splits
- Smart thermostats
- Duct sealing & insulation
Insulation & Air Sealing
- Attic insulation (R-49+)
- Wall insulation
- Basement & crawl space insulation
- Weather stripping
- Air sealing & vapor barriers
- Reflective barriers
Solar & Renewables
- Photovoltaic solar panels
- Solar water heaters
- Battery storage systems
- Solar attic fans
- Geothermal heat pumps
Windows, Doors & Other
- ENERGY STAR windows
- ENERGY STAR exterior doors
- Tankless water heaters
- Heat pump water heaters
- LED lighting retrofits
- Cool/reflective roofing
NJ Clean Energy Incentives (Stack with FHA EEM)
New Jersey offers some of the nation's best energy efficiency incentives, which can be combined with FHA EEM financing to dramatically reduce your effective cost.
Home Performance with ENERGY STAR
Up to $4,000 per single-family home for comprehensive energy upgrades including insulation, air sealing, and HVAC improvements.
- Insulation: $1,500-$2,500 rebate for attic, wall, basement upgrades
- Air Sealing: $500-$1,000 for comprehensive sealing
- HVAC: $1,000-$1,500 for high-efficiency systems
- Multi-family (2-4 units): $2,500 per unit
Federal Solar Investment Tax Credit (ITC)
30% tax credit for solar panel installation through 2032 (no maximum cap).
Example: $25,000 solar system = $7,500 federal tax credit in year 1. This credit directly reduces your federal tax liability dollar-for-dollar.
Additional NJ Incentives
- HVAC Rebates: $500-$1,500 for high-efficiency heat pumps, boilers
- Water Heater Rebates: $300-$750 for tankless or heat pump models
- Window/Door Rebates: $100-$300 per unit (ENERGY STAR certified)
- Solar RECs: Earn $90-$200/MWh selling solar credits to utilities
- EV Charger: Up to $500 for home charging station installation
Real Bergen County Example: Comprehensive Energy Upgrade
Scenario: $700,000 Home in Wayne, NJ
Energy Improvements Budget:
- Solar panels (8kW system): $22,000
- Attic & wall insulation (R-49): $12,000
- High-efficiency heat pump HVAC: $18,000
- ENERGY STAR windows (15 units): $11,000
- Air sealing & weather stripping: $4,000
- Tankless water heater: $3,000
Total Improvements: $70,000
FHA EEM Loan Structure:
- Base home price: $700,000
- Energy improvements: $70,000 (10% of home value, within 15% limit)
- Total loan: $770,000
- Down payment: $24,500 (3.5% of $700K base only)
- Monthly P&I at 6.5%: $4,866
Incentives & Rebates:
- Solar ITC (30% of $22K): -$6,600
- NJ Clean Energy (insulation/HVAC/air sealing): -$4,000
- HVAC rebate: -$1,200
- Water heater rebate: -$500
- Total Incentives: -$12,300
Net Results:
- Gross improvement cost: $70,000
- Less incentives: -$12,300
- Net financed cost: $57,700
- Monthly payment increase: $365 ($70K at 6.5%)
- Monthly energy savings: $250-$300 (reduced heating/cooling/electric)
- Net monthly cost after savings: $65-$115/month
- Added home value: $50,000-$70,000 (70-100% recovery at resale)
Ready to Finance Energy Improvements with Your Mortgage?
I help Northern NJ homebuyers access FHA EEM financing and navigate NJ Clean Energy incentives to maximize savings on green home improvements.
Frequently Asked Questions
What is an energy-efficient mortgage (EEM)?
An energy-efficient mortgage (EEM) allows borrowers to finance cost-effective energy improvements as part of their home purchase or refinance loan without increasing the down payment requirement. The FHA Energy Efficient Mortgage (FHA EEM) program lets you borrow up to 15% of the as-improved home value OR the cost of improvements (whichever is less) to upgrade heating, cooling, insulation, windows, doors, solar panels, water heaters, and other energy-saving features. Example: Purchasing a $700,000 Bergen County home. Base FHA loan = $700,000. Energy improvements cost $70,000 (new HVAC, insulation, solar panels). With FHA EEM, borrow $770,000 total ($700K home + $70K improvements) using one mortgage at one interest rate. The improvements must be cost-effective, meaning the total cost of improvements cannot exceed the present value of energy saved over the useful life of the improvements.
How much can I borrow for energy improvements with FHA EEM?
FHA EEM allows you to borrow the LESSER of: 5% of the property value (up to $6,000 without energy report), or 15% of the as-improved home value (with energy assessment), or the actual cost of energy improvements. Examples: $500,000 home can finance up to $75,000 in improvements ($575,000 total loan if improvements are $75K+). $700,000 home can finance up to $105,000 in improvements ($805,000 total loan). $1,000,000 home can finance up to $150,000 in improvements ($1,150,000 total loan). The 15% is calculated based on the as-improved appraised value, not the purchase price. An energy consultant (HERS rater or energy auditor) must provide a report showing improvements are cost-effective. You still only need 3.5% down on the BASE home price ($700K home = $24,500 down, regardless of improvements).
What NJ Clean Energy incentives are available for homeowners?
NJ Clean Energy offers rebates and incentives that can be combined with FHA EEM or conventional energy-efficient mortgages: Home Performance with ENERGY STAR (single-family): Up to $4,000 per home for comprehensive upgrades (insulation, air sealing, HVAC). Multi-family (2-4 units): Up to $2,500 per unit. Solar Investment Tax Credit (ITC): 30% federal tax credit for solar panel installation (no cap). NJ Solar Renewable Energy Credits (SRECs): Earn credits for selling solar power back to grid ($90-$200/MWh). HVAC & Water Heater Rebates: $500-$1,500 for high-efficiency heat pumps, boilers, water heaters. Window & Door Rebates: $100-$300 per unit for ENERGY STAR certified replacements. Electric Vehicle Charger: Up to $500 for home EV charging station installation. Example: $700K Bergen County home with $70K in improvements: $20,000 solar panels (30% ITC = $6,000 back), $25,000 insulation/air sealing ($4,000 NJ Clean Energy rebate), $15,000 HVAC ($1,500 rebate), $10,000 windows ($500 rebate). Total incentives: $12,000 reducing effective cost to $58,000 financed via FHA EEM.
What energy improvements are eligible for FHA EEM financing?
FHA EEM covers a wide range of energy-saving improvements that must be cost-effective: Heating & Cooling: High-efficiency furnaces, boilers, heat pumps, central AC, ductless mini-splits, smart thermostats, duct sealing. Insulation: Attic, wall, basement, and crawl space insulation upgrades to meet or exceed local building codes. Windows & Doors: ENERGY STAR certified replacement windows and exterior doors with improved U-factors and air sealing. Solar Energy: Photovoltaic (PV) solar panel systems, solar water heaters, battery storage systems. Water Heating: Tankless water heaters, heat pump water heaters, solar water heating systems. Air Sealing: Weather stripping, caulking, vapor barriers to reduce air infiltration and improve HVAC efficiency. Lighting: LED lighting retrofits throughout the home. Roof: Cool roofs or reflective roofing materials that reduce cooling costs. Improvements must: Be permanently affixed to the property, reduce energy consumption in a cost-effective manner (verified by energy consultant), meet local building codes and FHA property standards. Not eligible: Appliances (refrigerators, washers, dryers), portable equipment, cosmetic upgrades without energy benefit.
Do I need an energy audit for FHA EEM?
For improvements under $3,500, no energy assessment is required - just contractor bids. For improvements $3,500-$6,000, you can skip the formal energy assessment but must provide contractor documentation showing cost-effectiveness. For improvements over $6,000 (most cases for Bergen County homes), a formal energy assessment is required from: RESNET-certified Home Energy Rater (HERS rater), BPI-certified Building Analyst, Licensed engineer or architect with energy audit credentials. The energy assessment includes: Home Energy Rating System (HERS) score before and after improvements, itemized list of recommended improvements with costs, cost-benefit analysis showing payback period, verification that improvements meet FHA cost-effectiveness standards. Cost: $400-$800 for a comprehensive energy audit in Northern NJ. This cost can be rolled into your FHA EEM loan. Timeline: 2-3 weeks from audit to final report. The audit must occur BEFORE closing, and improvements can be completed within 90-180 days after closing.
Can I use FHA EEM when buying a fixer-upper?
Yes, FHA EEM is ideal for purchasing older homes that need energy upgrades. Combine with FHA 203(k) renovation loans for comprehensive rehab. FHA EEM for energy-only improvements: Purchase $600K older home with poor insulation, old HVAC, single-pane windows. Finance $60K in energy improvements (insulation, HVAC replacement, new windows, air sealing). Total loan: $660K at 3.5% down on the base $600K = $21,000 down payment. FHA 203(k) + EEM for full renovation: Purchase $500K fixer-upper. Finance $150K in general renovations (kitchen, bathrooms, structural). Add $50K in energy improvements (solar, insulation, HVAC). Total loan: $700K combining 203(k) and EEM benefits. The energy improvements must be cost-effective and cannot exceed the 15% limit, but they add significant value. Many Bergen County buyers purchase older homes in towns like Teaneck, Fair Lawn, and Hackensack, modernize with 203(k), and add energy upgrades with EEM to create highly efficient updated homes for under $700K total.
How do energy improvements affect my monthly payment and ROI?
Energy improvements increase your loan balance but reduce utility costs, often resulting in neutral or positive monthly cash flow. Example: $700K Bergen County home with $70K energy improvements financed via FHA EEM. Increased Loan Payment: $70K financed at 6.5% over 30 years = $442/month higher payment. Energy Savings: $350-$450/month reduction in utility bills (heating, cooling, electric). NJ average: $250/month heating/cooling + $150/month electric = $400/month total. After improvements: $150/month heating/cooling + $50/month electric (solar panels) = $200/month total. Monthly savings: $200/month. Net monthly cost: $442 (loan increase) - $200 (savings) = $242/month net increase. However, after 10 years: Total payments on $70K improvements: $53,040. Total energy savings: $24,000 ($200/month x 120 months). Net cost after savings: $29,040. Plus: $70K in added home value (energy improvements typically recover 70-100% at resale). Plus: $12,000 in upfront incentives (NJ Clean Energy + Solar ITC). Effective net cost: $17,040 for $70K in improvements = 76% ROI within 10 years. Solar panels alone often achieve payback in 8-12 years and add 4-6% to home resale value.
Can I refinance with an energy-efficient mortgage to add improvements?
Yes, FHA EEM refinances allow you to add energy improvements to your existing mortgage without a separate loan. How FHA EEM refinance works: Current mortgage: $650,000 at 7.0% on a $700,000 home. Energy improvements needed: $50,000 (solar panels, insulation, new HVAC). Current rate environment: 6.25% available for refinance. FHA EEM refinance loan: $700,000 ($650K existing mortgage + $50K improvements) at 6.25%. You lower your rate from 7.0% to 6.25% AND add $50K in improvements without cash out-of-pocket. Conventional EEM refinance (less common): Some lenders offer conventional energy-efficient refinances for homeowners with 20%+ equity. Lower mortgage insurance than FHA. Can finance improvements up to 10% of home value. Home equity loans vs EEM refinance: HELOC/Home Equity Loan: Borrow $50K at 8-10% for improvements (second lien). FHA EEM Refinance: Finance $50K at 6.25% (single first mortgage with lower rate on entire balance). Best option: If current rates are lower than your existing mortgage rate, refinance with FHA EEM to lower rate AND add improvements in one transaction.
Are there income limits for FHA EEM or NJ Clean Energy programs?
FHA EEM has NO income limits - available to all qualified borrowers regardless of income. FHA EEM qualification is based solely on: Credit score (580+ for 3.5% down, 500-579 for 10% down). Debt-to-income ratio (43-50% max including new loan with improvements). Employment and income verification. Down payment (3.5% of base purchase price, not including improvements). NJ Clean Energy Home Performance with ENERGY STAR has income tiers for enhanced rebates: Standard Tier (no income limit): Up to $4,000 per home for comprehensive improvements. Moderate Income Tier (80-120% Area Median Income): Up to $5,000 per home + 0% financing for 10 years. Low-to-Moderate Income Tier (50-80% AMI): Up to $6,000 per home + grants covering 75% of improvement costs. Bergen County AMI (2025): 1-2 person household = $135,000 median. 3-4 person household = $155,000 median. Most Northern NJ homebuyers qualify for standard tier ($4,000) with no income documentation required. Solar tax credits (30% ITC) and SRECs have no income limits and are available to all homeowners installing solar panels.
What is the application process for FHA EEM in New Jersey?
The FHA EEM application process adds a few steps to the standard FHA loan process: Step 1: Pre-Approval (1-2 weeks) - Apply for FHA loan with energy-efficient mortgage rider, provide income/credit/employment documentation, get pre-approved for base loan + estimated improvement amount. Step 2: Find Home & Schedule Energy Audit (2-4 weeks) - Identify property to purchase, hire RESNET-certified HERS rater ($400-$800), conduct energy audit and receive report with recommended improvements and cost estimates. Step 3: Contractor Bids (1-2 weeks) - Obtain bids from licensed contractors for recommended improvements, provide bids to lender to finalize improvement loan amount, lender verifies improvements are cost-effective and within 15% limit. Step 4: FHA Appraisal (1-2 weeks) - Appraiser values home in current condition AND as-improved value after planned energy work, appraisal must support both base price and improvement costs. Step 5: Underwriting & Approval (2-3 weeks) - Lender underwrites loan with improvement escrow account, FHA reviews and approves with energy improvement rider. Step 6: Closing (1 day) - Close on loan with improvement funds held in escrow, receive keys and begin improvement work within 90-180 days, contractors paid from escrow upon completion. Step 7: Final Inspection (after completion) - Energy consultant verifies improvements were completed per plan, lender inspects and releases final escrow funds, home receives updated HERS rating. Total timeline: 60-90 days from application to closing, plus 3-6 months for improvement completion.