B5-3.3-01, HomeStyle Energy for Improvements on Existing Properties (12/11/2024)

There are a number of HomeStyle Energy financing options available to a borrower who wishes to improve the energy and/or water efficiency of an existing property and decrease its related utility costs. HomeStyle Energy may also be used to create home resiliency for environmental disasters such as floods, storms, and earthquakes, or to repair damage from these types of disasters.

There is no minimum dollar amount for the improvements; the maximum dollar amount depends on the type of HomeStyle Energy activity and the transaction, described in the table below.

Note: Lenders may use HomeStyle Energy financing in conjunction with HomeStyle Renovation to finance energy-related improvements that exceed the amounts in the table above. See Section B5–3.2, HomeStyle Renovation Mortgage, for the requirements.

A lender does not need special approval to deliver HomeStyle Energy loans to Fannie Mae.

A lender may deliver a HomeStyle Energy loan with eligible improvements as soon as the loan is closed. The eligible improvements do not have to be completed when the mortgage is delivered to Fannie Mae. HomeStyle Energy loans are not subject to recourse.

The lender must establish a completion escrow for incomplete energy improvements. The improvements must be completed no later than 180 days from the date of the mortgage note. For requirements related to the completion of the postponed improvements, including escrow accounts, disposition of funds after work completion, and title reports, see the applicable table in B4-1.2-05, Requirements for Verifying Completion and Postponed ImprovementsB4-1.2-05, Requirements for Verifying Completion and Postponed Improvements.

The term "energy-related improvements" is used throughout this Guide, and includes all eligible improvements described in this topic. All energy-related improvements must be permanently affixed to the property except for certain appliances installed with kitchen and utility room remodels when completed as part of a HomeStyle Renovation loan. See  B5-3.2-01, HomeStyle Renovation MortgagesB5-3.2-01, HomeStyle Renovation Mortgages, for additional information.

In addition to energy and water efficiency improvements, HomeStyle Energy can be used to repair homes damaged in a natural disaster or by an environmental hazard and to install resiliency or preventative improvements, including the following:

• storm surge barriers;

• foundation retrofitting for earthquakes;

• hazardous brush and tree removal in fire zones;

• retaining walls to address mud or water flows; and

• other items specifically needed to either repair environmental hazard damage or improve the home’s ability to withstand environmental hazards such as hurricanes, tornadoes or wind storms, earthquakes, flooding, landslides, and wildfires.

Installation of radon remediation systems is also an eligible improvement under HomeStyle Energy.

ENERGY STAR-Certified Improvements

HomeStyle Energy can be used to finance energy-related improvements that are included in the List of ENERGY STAR Efficient Products.

All one- to four-unit existing properties are eligible for HomeStyle Energy. All property types are eligible. Manufactured homes are eligible provided the improvements do not include structural changes.

All occupancy types are permitted.

Energy-related improvements are permitted on existing properties in conjunction with all standard Guide products and features including, but not limited to:

• high-balance loans,

• Community Seconds,

• loans with deed restrictions (including programs that allow below market rate mortgages),

• down payment assistance programs,

• HomeReady loans, and

• Community Land Trusts.

Loans with energy-related improvements are subject to the applicable LTV, CLTV, and HCLTV ratios for purchase and limited cash-out refinance transactions found in the Eligibility Matrix. Energy-related improvements cannot be financed in the loan amount of a high LTV refinance loan.

Note: Energy-related improvements are permitted on a cash-out refinance, however the transaction is not considered a HomeStyle Energy loan. All standard cash-out refinance policies apply.

Purchase Transactions: In a purchase transaction, the proceeds can be used to finance the acquisition of the property and the cost of energy-related improvements or the amount to payoff PACE debt. The LTV ratio is determined by dividing the original loan amount by the lesser of

• the “as completed” appraised value of the property

• the sum of the purchase price of the property plus the cost of the energy-related improvements, or

• the sum of the purchase price plus the total amount of PACE debt to be paid off.

Limited Cash-out Refinance Transactions: When a loan is originated as a limited cash-out refinance, the loan must meet all of the standard requirements for limited cash-out refinances (as described in B2-1.3-02, Limited Cash-Out Refinance TransactionsB2-1.3-02, Limited Cash-Out Refinance Transactions).

Energy-related improvements may be financed in the loan amount. Proceeds may also be used to pay off an existing PACE loan or other debt (secured or unsecured) that financed energy-related improvements. The standard cash back allowance of the lesser of 2% of the loan amount or $2,000 is permitted on these loans.

For limited cash-out refinance transactions, the LTV ratio is determined by dividing the original loan amount by the “as completed” appraised value of the property when the mortgage is being delivered prior to the completion of the improvements. If the appraisal was completed after the completion of the improvements, then the LTV ratio is determined by dividing the original loan amount by the appraised value of the property.

Borrowers are required to obtain a residential or home energy report to identify the recommended energy improvements to the property and the estimated cost savings associated with those improvements when they are using funds for new energy-related improvements.

The energy report must be reviewed by the lender and must

• identify the recommended energy improvements and expected costs of the completed improvements;

• specify the monthly energy savings to the borrower; and

• verify that the recommended energy improvements are cost-effective. Energy improvements are determined to be cost-effective when the cost of the improvements, including maintenance, is less than the present value of the energy saved over the useful life of the improvements. (The cost-effectiveness of the improvements may be assessed in the aggregate and are not required to be assessed separately for each energy improvement.)

The report must meet at least one of the following standards:

• A Home Energy Rating Systems (HERS) report completed by a HERS rater who is accredited under the Mortgage Industry National Home Energy Rating Standards (HERS Standards), as adopted by the Residential Energy Services Network (RESNET®). A list of accredited HERS raters by state can be located at RESNET’s website.

• A Department of Energy (DOE) Home Energy Score Report completed by an independent third-party energy assessor with credentials obtained through one or more of the organizations listed as eligible under the DOE program. A list of acceptable organizations can be found on the DOE website.

• A rating report completed by an independent and certified home energy consultant or auditor, comparable in rating methods and scope to the HERS or Home Energy Score evaluation, and that is permitted under a local or state level home energy certification or audit program.

The energy report must be dated no more than 24 months before the note date.

If the cost of the energy report is paid for by the borrower, the cost may be financed as part of the mortgage by including it in the cost of the energy improvements. The cost must be included on the settlement statement if it is financed in the mortgage loan.

Exceptions to Energy Report Requirements: Energy reports are not required in certain circumstances. Alternative documentation (other than an energy report) is acceptable in the following circumstances:

• Weatherization items – If the transaction only involves financing the purchase of basic weatherization items (such as programmable thermostats and insulation) or water efficiency devices (such as low-flow showerheads) totaling up to $3,500. Acceptable documentation includes, but is not limited to, a copy of invoices or receipts for energy-related expenses or copies of contractor invoices for completing the basic weatherization items.

• Payoff of PACE loans – Documentation must show that the funds are used solely to pay off the PACE loan obtained for energy improvements on the subject property.

• Payoff of non-PACE energy-related debt - Documentation must show the funds were used solely for the purchase and installation of eligible energy-related improvements on the subject property.

• Energy improvements related to the installation of renewable energy sources including water efficiency devices, solar panels, wind power devices, and geothermal systems - Acceptable documentation includes, but is not limited to, a copy of invoices or receipts for installing the systems or devices.

• ENERGY STAR-certified products - The lender must maintain documentation in the loan file that shows the energy-related improvement is on the List of ENERGY STAR Energy Efficient Products.

• Improvements to install a radon remediation device - Documentation for the cost of the system and its expected impact on the radon levels in the home must be obtained.

• Environmental hazard damage repairs or resiliency improvements - Acceptable documentation includes, but is not limited to, a copy of invoices or receipts for the expenses or copies of contractor invoices for completing the repairs or improvements.

Loans using HomeStyle Energy flexibilities can be underwritten manually or through DU.

For loans underwritten in DU, specific information must be provided in the online loan application in Section L1 as follows:

• Energy Improvement - Select the applicable check boxes.

• Energy improvements included in transaction - Enter the amount of new energy improvements that are included in the purchase or limited cash-out transaction, and any non-PACE energy debt being paid off with the limited cash-out transaction. Non-PACE energy debt included in this field should not be included in Section L4 Line D.

• Payoff Amount of any PACE loan - Enter the payoff amount of any existing PACE loans that will be paid off in the subject transaction. PACE energy debt should not be included in Section L4 Line D.

For loans involving energy-related improvements that are underwritten manually, a maximum debt-to-income ratio of 45% is allowed if the transaction satisfies all criteria in the Eligibility Matrix for a 45% DTI ratio on a manually underwritten loan.

When the transaction does not meet the requirements for an expanded DTI ratio up to 45%, the borrower may have a DTI ratio up to 38% (instead of 36% DTI ratio) when the lender obtains a DOE Home Energy Score Report on the subject property with a score of 6 or higher. All other underwriting requirements, such as the down payment, credit score, and reserve requirements, are identical to those for a similar transaction with a maximum DTI ratio of 36%. If the lender obtained a comparable industry energy efficiency report that demonstrates the property has met the standards for increased energy efficiency, that report may be used to all for a DTI ratio up to 38%. This DTI ratio flexibility is not permitted on transactions for which no energy report was obtained.

All HomeStyle Energy loans require an appraisal based on an interior and exterior property inspection and must be completed on the appropriate form depending on the property type. When the loan is being delivered prior to the completion of the energy-related improvements, appraisers must determine the “as completed” value of the property subject to the improvements being completed. A certification of completion is required when the mortgage is delivered prior to the completion of the improvements. For requirements related to the certification of completion, see B4-1.2-05, Requirements for Verifying Completion and Postponed ImprovementsB4-1.2-05, Requirements for Verifying Completion and Postponed Improvements.

The lender is responsible for

• ensuring that the appraiser has been provided with a copy of the energy report, if one was required, and other required documentation described in this topic,

• managing the completion escrow account in which improvement funds are held, and

• monitoring the completion of the HomeStyle Energy improvement work.

See the requirements related to the energy-related improvement feature in B4-1.2-05, Requirements for Verifying Completion and Postponed ImprovementsB4-1.2-05, Requirements for Verifying Completion and Postponed Improvements.

The lender must maintain a copy of all documentation in the individual loan file that supports the energy-related improvement work, such as the energy report, “as completed” appraisal, home improvement contract, certification of completion, and title insurance endorsements or updates (if applicable).

Fannie Mae will credit the lender a $500 LLPA for loans with financed energy-related improvements on existing properties. SFC 375 must be delivered for the credit to be applied. See the Loan-Level Price Adjustment (LLPA) Matrix .

The following SFCs are required for loans with eligible energy-related improvements. These codes also apply to delivery of HomeStyle Renovation loans with energy-related improvements.