"Can You Add Energy Improvements to a VA Loan? How the VA Energy Efficient Mortgage Works"

The inspection report is open on your kitchen table, and page twelve is a photo of the attic. A few inches of tired insulation, flattened in places, with daylight showing at the eaves. Two pages later the inspector notes that the heat pump is close to the end of its expected life, and the windows in the back bedrooms are single pane. None of it stops you from buying the home, but every item on that list affects your power bill from the first month you live there.

A VA energy efficient mortgage adds the cost of energy improvements to your VA purchase or refinance loan. The loan can go up by as much as $3,000 on documented costs alone, or up to $6,000 when your lender shows the higher payment does not exceed your likely utility savings. VA allows nothing above $6,000, and the work can finish after closing.

I'm Jeff Moran, a mortgage broker in Bluffton, South Carolina, originating since 1996, NMLS #483943, through C2 Financial Corporation, and licensed in fifteen states. I wrote this for you if you are a veteran buying a home or refinancing with a VA loan and the home could use some energy work. Every rule below comes from VA's Lenders Handbook, Chapter 7, Topic 3, titled "Energy Efficient Mortgages" and last changed March 11, 2019, unless I name another section beside the claim.

What is a VA energy efficient mortgage?

VA calls it an EEM, and it is a loan that covers the cost of making energy efficiency improvements to a home. The cost of the work is added to your VA loan amount, and you repay it as part of the same monthly payment.

You can pair an EEM with a VA loan to buy an existing home, or with a VA refinancing loan secured by the home. Chapter 3 of the handbook, in its list of eligible loan purposes, says these energy improvement loans can be made together with any type of VA purchase or refinancing loan. That covers the VA IRRRL, the streamline refinance described on the VA loan page, and a VA cash-out refinance.

If you are buying, you'll see the program mentioned on your Notice of Value. That is the document VA issues with the appraised value, which VA calls the reasonable value. On a purchase or a cash-out refinance, it carries a notice suggesting a home energy audit and saying the mortgage amount may be increased for energy efficiency improvements. In some areas, the notice says, the utility company may do the audit for you.

Which improvements count for a VA energy efficient mortgage?

VA lists these as acceptable improvements, and it says the list is not limited to them:

• Solar heating systems, including solar systems that heat water for the home
• Solar heating and cooling systems
• Caulking and weather-stripping
• Furnace efficiency modifications, limited to replacement burners, boilers or furnaces designed to burn less fuel, devices that make the flue more efficient, and electric or mechanical ignition systems that replace a standing gas pilot light
• Clock thermostats, the programmable kind that change the temperature on a schedule
• New or additional insulation in the ceiling, attic, walls and floors
• Water heater insulation
• Storm windows and storm doors, including thermal windows and doors
• Heat pumps
• Vapor barriers

The list gives the examples VA had in mind, and the Notice of Value adds that "other energy related improvements may also be considered." A cosmetic project like a kitchen remodel is a different conversation, because the work has to be about using less energy.

The $3,000 and $6,000 tiers, and what your lender documents

VA sets two dollar tiers and a hard ceiling. The ceiling comes from federal law, 38 U.S.C. §3710(d).

Your situation	What VA requires	What goes in the closed loan file
Up to $3,000	The documented cost of the improvements. VA expects the higher payment to normally be offset by lower utility bills.	A copy of the bid or contract itemizing each improvement and its cost
More than $3,000, up to $6,000	The lender decides that the increase in the monthly payment does not exceed the likely drop in monthly utility costs.	The bid or contract, plus the lender's written determination on the utility savings
More than $6,000	VA does not permit it.	Not available as an EEM
IRRRL where the new payment is 20 percent or more above the old one	The lender certifies that it has determined you qualify for the higher payment.	The lender's certification

For the middle tier, your lender has to rely on locally available information from utility companies, cities and towns, state agencies or other reliable sources. If you and I are working on one of these files, a home energy audit is worth having, because it gives your lender a savings figure that came from somebody other than you or the contractor.

When you're ready, please provide the signed contract or the written bid from each contractor, all pages, showing every improvement and its cost on its own line. If you have a home energy audit or an estimate of savings from your utility company, please provide that too. We will need both to show the cost and, above $3,000, the savings.

How do you add energy improvements to a VA loan?

On an energy efficient mortgage, the steps run in this order, and I'll walk you through each one as we go.

1. Your inspection and an energy audit come first. They tell you what the home needs.
2. Each contractor gives you a written bid. It should itemize every improvement and its cost, because that itemized bid or contract goes into the closed loan file.
3. Your lender matches the cost to a tier. Above $3,000, that includes comparing the payment increase with the utility savings information.
4. Your lender builds the loan amount. On a purchase, VA's maximum loan calculation in Chapter 3 is the lesser of the reasonable value or the purchase price plus up to $6,000 of energy improvements, with the funding fee added on top unless you are exempt.
5. You close, and the work finishes before or after. If it is done before closing, your lender documents the cost. If not, the money is held back, which is the next section.

Finishing the work after closing

You don't have to have the contractor in the home before you own it. If the improvements are not finished before closing, your lender can hold back the money and close the loan. A formal escrow account is not required, and the lender holds back only the amount needed to finish the work.

The improvements should generally be completed within 6 months of the closing date. Your lender makes sure the money pays for the improvements and tells VA in writing when the work is done.

If, after a reasonable time, your lender decides the work is not going to be finished, the remaining money is applied to reduce the principal balance of your loan, and the lender notifies VA.

Conventional loans handle unfinished work under their own rules. If you are comparing the two, how a completion escrow works on a conventional loan covers Freddie Mac's version.

Your entitlement and the funding fee on an energy efficient mortgage

Your entitlement is the amount VA guarantees on your behalf, and using it on one loan affects what is available for the next. On an energy efficient mortgage, VA charges your entitlement only on the loan amount before the energy improvements are added. So the improvements do not use up any more of your entitlement.

The cash-out refinance section in Chapter 6, revised October 30, 2024, says the same thing about a cash-out loan: the EEM portion does not increase the entitlement charged to you. That section also says the improvements and the funding fee must not push a cash-out loan above 100 percent of the reasonable value.

The VA funding fee works the other way. Your lender calculates it on the full loan amount, including the cost of the energy improvements. If you are exempt from the funding fee, that does not change. If you pay it, the fee is a little larger because the loan is a little larger.

Energy improvements on a VA IRRRL refinance

The IRRRL, the Interest Rate Reduction Refinancing Loan, normally has to lower your principal and interest payment. Chapter 6, Topic 1 lists three exceptions, and adding energy efficiency improvements is one of them. So an IRRRL can include the work even if your payment comes out higher.

If your new monthly payment, counting principal, interest, taxes and insurance, is 20 percent or more above the payment on the loan you are refinancing, the lender has to certify that it determined you qualify for the higher payment.

You generally can't take cash out of an IRRRL, and energy work is the one exception. Up to $6,000 of the loan proceeds can reimburse you for energy efficiency improvements completed within the 90 days immediately before the loan. If you already replaced the heat pump this summer and are refinancing this fall, please keep the paid invoice, all pages, with the completion date on it. We will need it to show the work finished inside that 90-day window.

Details that keep an energy efficient mortgage on track

• The best time to mention it is before the loan amount is set. The cost becomes part of your loan, so it is easier to plan for at the start.
• The 6-month window starts at closing. If the work will finish after you move in, you'll want a contractor who can complete it inside that window.

An example, with invented numbers

Numbers below are made up to show the mechanism. They are not a quote, and they are not anyone's real file.

Say the home you are buying needs attic insulation and a new heat pump, and the written bids total $4,800. That is above $3,000, so your lender also needs to show the payment increase is covered by likely utility savings.

Energy improvements, itemized bids      $4,800
Added to the monthly payment               $26
Utility company's estimated savings        $38
                                       -------
Savings left over each month               $12

The added payment is lower than the likely savings, so the $4,800 fits the second tier. Your entitlement is charged on the loan amount before the $4,800. If the contractor can't start until after you move in, the $4,800 is held back at closing and paid out as the work is done.

Common questions

What is a VA energy efficient mortgage?

A VA energy efficient mortgage, which VA calls an EEM, adds the cost of energy efficiency improvements to a VA loan. It can be made with a VA loan to buy an existing home or with a VA refinancing loan, including an IRRRL or a cash-out refinance.

How much can I add to a VA loan for energy improvements?

VA sets two limits, and the table earlier on this page shows both. The lower limit needs only the documented cost of the improvements. Above it, up to VA's ceiling, the lender also has to determine that the increase in your monthly payment does not exceed the likely reduction in your monthly utility costs. VA does not permit an energy efficient mortgage above that ceiling, citing 38 U.S.C. §3710(d).

Can I use a VA energy efficient mortgage for solar?

VA names solar heating systems, including solar water heating, and solar heating and cooling systems in its list of acceptable improvements. The list says acceptable improvements include but are not limited to those items, so your lender reads your contractor's contract against VA's guidance. If the home you are buying already has panels, buying a home with solar panels covers the contract questions.

Does a VA energy efficient mortgage use more of my entitlement?

No. VA charges your entitlement only on the loan amount before the cost of the energy improvements is added. The VA funding fee, if you pay one, is calculated on the full loan amount including the improvements.

Do the energy improvements have to be finished before closing?

No. VA lets the lender hold back the amount needed to finish the work and close the loan, and a formal escrow account is not required. The improvements should generally be completed within 6 months of closing. If the lender decides the work will not be finished, the remaining money is applied to reduce your loan balance.

Can I be reimbursed for energy improvements on a VA IRRRL?

Yes. A VA IRRRL generally can't give you cash, with one exception. Part of the loan proceeds, up to the same ceiling that applies to an energy efficient mortgage, can reimburse you for energy efficiency improvements completed within the 90 days immediately before the loan.

Your next step

VA loans are priced in Rate & Best Fit on the homepage, and you can see VA pricing for a scenario like yours without a credit pull or an account. Once you see the options, you can choose a rate option that works best for you, and that selection can change as the file comes together. If you have an inspection report or an energy audit in hand and would like help working out how much of the work can go into your loan, you are welcome to call me.

My South Carolina VA loan page covers what is different about a VA file here, and residual income on a VA loan explains the other test your payment has to pass. If you are in Alaska, the state housing agency has its own program, and how an Alaska energy rating can lower your mortgage rate walks through it.

Nothing here is a loan approval, a denial, or a commitment to lend. VA Pamphlet 26-7 is the authority, and your lender applies it to your own file.