Background and purpose

Energy-efficient mortgages (EEMs) were developed to lower household energy use and remove the upfront cost barrier for efficiency upgrades. Federal programs and private lenders adopted EEM features in the 1990s and since then have refined underwriting to factor expected utility savings into loan affordability (see HUD and VA program materials for program specifics).

How EEMs work, in practical terms

  • When you buy or refinance, an EEM lets you add approved energy upgrades to the mortgage balance instead of paying cash up front.
  • Lenders usually require an energy assessment or audit to estimate annual savings and to identify qualifying measures.
  • Underwriting can treat estimated utility savings as income or lower housing expense, which helps the borrower qualify for a slightly larger loan without materially increasing monthly outlay.
  • Funds are typically disbursed at closing or held in escrow for work to be completed shortly after closing.

In my 15 years advising homeowners, I’ve seen EEMs most effective when clients pair a short audit-driven scope of work (insulation, air sealing, high-efficiency HVAC) with conservative savings estimates — that combination keeps expectations realistic and improves outcomes.

Typical eligible improvements

Common qualifying upgrades include: insulation and air sealing, high-efficiency heating and cooling systems, ENERGY STAR windows and doors, efficient water heaters, and some solar or renewable-ready installations. Exact eligible items depend on the lender and program (for program-specific lists see the FHA Energy-Efficient Mortgage program and the VA Energy Efficient Mortgage).

Who is eligible

EEMs are available to homebuyers and owners refinancing an existing mortgage. Specific programs may target first-time buyers, veterans, or borrowers using government-backed loans. Lender overlays and local underwriting rules vary, so compare options and ask whether an energy audit is required.

Pros and cons

Pros:

  • Lower upfront cost for efficiency projects.
  • Expected utility savings can make upgrades cash-flow neutral.
  • Often available with purchase and refinance loans.

Cons:

  • You add improvements to your mortgage balance, increasing total interest paid over the loan term.
  • Estimated savings are projections, not guarantees — performance varies with installation quality and occupant behavior.
  • Some lenders limit eligible measures or require specific audit documentation.

Steps to apply and what to expect

  1. Get an energy audit or guidance from an approved rater to identify cost-effective measures. (Many programs require a written audit.)
  2. Request EEM options from multiple lenders and compare how each treats projected savings.
  3. Include realistic cost estimates and contractor bids in your loan package.
  4. Close the mortgage; funds are either included in the loan at closing or held in escrow for the contractor.
  5. Complete improvements and retain receipts and any final efficiency reports.

Practical tips

  • Prioritize low-cost, high-payback measures first (air sealing, insulation, thermostat upgrades).
  • Use a licensed contractor and require performance testing when relevant (duct tests, blower-door).
  • Compare an EEM to alternatives like retrofit loans, home equity, or energy-specific loans — see our guide on green mortgages and energy-efficient financing for comparison guidance.
  • Factor the interest rate and loan term into your decision; a longer term reduces monthly impact but increases cumulative interest.

Common misconceptions

  • “EEMs guarantee bill reductions.” They don’t guarantee exact savings; they finance measures expected to reduce energy use based on audits and typical household behavior.
  • “You must have perfect credit.” Credit and income still matter — EEMs expand financing options but don’t bypass standard underwriting.

Quick checklist before choosing an EEM

  • Obtain an energy audit and written savings estimate.
  • Get multiple lender quotes and ask how savings are calculated.
  • Confirm eligible measures and documentation requirements.
  • Compare total cost (interest + principal) versus paying cash or using another loan type.

Professional disclaimer

This page is educational and not individualized financial or legal advice. Program rules and lender practices change; consult a licensed mortgage professional, HUD- or VA-approved counselor, or certified energy auditor for guidance tailored to your situation.

Authoritative sources

  • U.S. Department of Housing and Urban Development (HUD): https://www.hud.gov
  • U.S. Department of Veterans Affairs (VA): https://www.va.gov
  • U.S. Environmental Protection Agency (EPA) and Department of Energy (DOE) resources on home energy efficiency

For program-level details and eligibility, check the linked FHA and VA program pages on FinHelp or speak with a lender experienced in energy-efficient mortgages.