Deciphering the VA Lender’s Handbook Chapter 7 Part 10
The last two articles have been about the Energy Efficient Mortgage that the VA offers as an add-on to most new purchase and refinance loans in the VA loan program. The first article covered basic information about the EEM that is foundational for understanding the rest of the details. The last article covered the amounts that an EEM can be made for and the different information required for approval at each level. In this article we’ll be briefly covering how an EEM affects the amount of entitlement is used on the loan, how the funding fee is calculated, and then we’ll go into larger detail about how the funds from an EEM can be paid out.
As a borrower, you should be aware that getting an EEM along with your VA loan will affect the amount of guaranty that your lender is eligible to receive in the event that you default on your loan. While this doesn’t affect you directly, it’s always best to know what’s going on on the other side of the desk. What is also good for you to know is how an EEM affects the amount of entitlement that you are using for your VA loan. Luckily, the answer is quite simple: it doesn’t. The amount of entitlement used on your VA loan stays the same even if you get an EEM. Consider the following example the Handbook provides:
“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.”
Even though the addition of the EEM does not affect your entitlement, it does affect the amount you are charged for the VA funding fee. The amount of the EEM is added to the total loan amount to calculate the funding fee due at closing.
So, with those covered, we can move on to how the money from an EEM is paid out. In many cases, the improvements are made after the loan has been approved but before loan closing. If this is the case, usually the borrower initially pays out of his or her pocket and is reimbursed at closing. To be reimbursed through an EEM, the borrower needs to have done the improvements no more than 90 days before the closing date (they need to be fairly recent). If the improvements are not finished prior to closing, the lender can either establish an escrow or earmark an account with the funds and close the loan. You should be aware that a formal escrow is not required and that only the amount needed to complete the improvements can be withheld. Your lender will explain the particulars to you if you find yourself in this situation.
The VA has a loose requirement that the improvements be completed within 6 months of closing the loan. There are exceptions to the 6-month rule, but additional reporting must be done to the VA. Your lender will fill you in on this if you get in this situation. You will need to keep your lender notified of the progress of the improvements because he or she is required to notify the VA when the improvements are completed, and will also be instrumental in making sure the EEM funds are properly applied to the cost of improvements.
Also, your lender has the power to determine that the improvements are not going to be completed and apply the unused balance to pay off the principal in your loan. If your lender has not gotten any updates or notifications from you in a long time and is unable to confirm that the improvements are making progress, you may find yourself in a frustrating situation. Your lender will be a very important person to keep in the loop while these improvements are being done. Remember that an EEM can be added to almost any VA loan, including new purchase loans, cash-out refinances, and Interest Rate Reduction Refinance Loans (IRRRLs).