What is a HomeStyle® Energy Loan?
HomeStyle® Energy loans for both purchase and refinance are available to borrowers who wish to improve the energy and/or water efficiency of an existing property and decrease its related utility costs. HomeStyle® Energy loans 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. On refinances, HomeStyle® Energy loans may be used to pay off PACE or non-PACE secured or unsecured debt that financed energy-related improvements.
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.
An energy report may be required.
What properties are eligible for a HomeStyle® Energy Loan?
Eligible properties include:
- 1-4 units, owner-occupied
- 1 unit second homes
- Historical Properties (require approval for repairs from governing historical society)
- Modular homes
- Planned Unit Developments (“PUD”)
- Townhome
What improvements are allowed with a HomeStyle® Energy Loan?
Types of eligible energy-efficiency improvements include, but are not limited to:
- Programmable thermostats
- Caulking or weather stripping
- Adding ceiling, wall, or floor insulation
- Air sealing
- Air conditioning/heating replacement to high efficiency
- Solar water heaters
- Low-flow water fixtures
- High-efficiency refrigerators/freezers, water heaters, and light bulbs
- Replacement of windows and doors
- Any energy-related improvements that are included in the list of ENERGY STAR Efficient Products
All energy-related improvements must be permanently affixed to the real property, except for certain appliances installed with kitchen and utility room remodels.
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
- 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.
The following applies to all HomeStyle Energy loans:
- Any work performed or materials purchased prior to closing is not eligible to be financed into the loan
- Improvements or changes made to the initial scope of work as identified in the contractor’s bid that were not pre-approved by Diamond Residential Mortgage Corporation in advance may not be eligible for reimbursement
What are the HomeStyle® Energy Loan Appraisal Requirements?
As-Is Appraisal: An “as-is” appraisal is required when there is no renovation component to the loan such as when the HomeStyle® Energy loan is being used to pay off PACE or non-PACE secured or unsecured debt that financed energy-related improvements.
After-Improved Appraisal: An after-improved appraisal is required for every HomeStyle® Energy loan with a renovation component.
What are the HomeStyle® Energy Loan Financeable Renovation Costs?
Minimum/Maximum Energy Improvement Costs, Fees, and Reserves Allowed
There is no minimum dollar amount for the improvements.
The maximum dollar amount depends on the type of HomeStyle® Energy activity and the transaction, as described below:
Renovation of an existing property to make energy-related improvements
- For purchases or limited cash-out refinances, up to 15% of the “as completed” appraised value of the property
Payoff of non-PACE secured or unsecured debt that financed energy-related improvements
- For limited cash-out refinances, up to 15% of the appraised value of the property. The energy-related debt must be paid off in full. Partial payoffs are not permitted Note: If a HomeStyle® Energy loan includes both new energy-related improvements and payoff of previously acquired energy-related debt, the total of both cannot exceed 15%
Payoff of existing PACE loan
- For purchases or limited cash-out refinances, all outstanding PACE debt may be paid off up to the maximum allowable loan-to-value (“LTV”) for the transaction and occupancy type. The PACE loan must be paid off in full. Partial payoffs are not permitted
You may use HomeStyle Energy financing in conjunction with HomeStyle® Renovation to finance energy-related improvements that exceed the amounts mentioned above.
Other Renovation-Related Costs That May Be Financed
- A contingency reserve will be funded to cover unforeseen repairs that are discovered during renovation. The amount of contingency will be 20% of the bid amount. Contingency reserves are required and typically financed in the loan amount (i.e., Financed Contingency). Alternatively, you may bring funds to closing to fund the contingency reserves; however, any assets required to fund the contingency reserves must be documented and verified above the amount required for down payment and reserves (i.e., Borrower-Funded Contingency)
- Hard costs (i.e., labor and materials from the contractor’s bid)
- Architectural fees (only when combined with HomeStyle Renovation)
- Engineering fees (only when combined with HomeStyle Renovation)
- Consultant fees (only when combined with HomeStyle Renovation)
- Draw inspection fees
- Title update fees
- Permit costs
- Mortgage Payment Reserves not to exceed six (6) months’ principal, interest, property taxes, and homeowner’s insurance payments, depending on the length of time the property will be uninhabitable during renovation (only when combined with HomeStyle Renovation)
- Draw Management Fees
Other Highlights of the HomeStyle® Energy Loan
- First-time homebuyers may put down as little as 3% of the purchase price plus total renovation costs. Other buyers may put down as little as 5% of the purchase price plus total renovation costs
- Homeownership education is required if loan-to-value (“LTV”) or combined loan-to-value (CLTV) ratio exceeds 95% for a purchase transaction and all borrowers are first-time homebuyers
- Homeowners who are refinancing a loan owned by Fannie Mae® may finance up to 97% LTV. If the existing loan is not owned by Fannie Mae®, the maximum LTV allowed is 95%
- Mortgage insurance is required when LTV exceeds 80%
- Your contractor’s credentials will be vetted. Any contractor hired will have to provide proof of licensing (if required), a Certificate of Liability Insurance, Worker’s Compensation (if required), any specialty certifications required (e.g., lead-based paint, mold, radon, asbestos), and a signed IRS W-9 Form
- Your contractor’s bid has to meet certain requirements such as being on contractor letterhead, naming you as the client, identifying the property where the work will take place, a full description and the location of all work being performed, a labor and materials breakdown per line item, permits and their associated costs, accurate tally of all sub-totals and the grand total, start and completion dates, and number of draws needed. If the property will be uninhabitable during renovation, the contractor should indicate so and let us know how long the property will be uninhabitable
- You may be able to perform some of the work yourself if the property is a 1-unit property and will be your primary residence. When allowed, Do-It-Yourself (“DIY”) improvements may not represent more than 10% of the “as completed” value of the property. To find out whether or not you would be allowed to perform work, contact me
- A Consultant is not required for HomeStyle® Energy loans unless combined with HomeStyle Renovation and a Consultant is required per HomeStyle® Renovation guidelines
- Gifts are allowed on purchases
- HomeStyle® Energy loans may be combined with HomeStyle® Renovation or HomeReady loans
- All permits should be pulled immediately after loan closing, work should commence within thirty (30) days’ of loan closing, work should not cease for any thirty (30) day period, and must be completed within 180 days of loan closing
Draw Process of the HomeStyle® Energy Loan
Allowable Disbursements at Loan Closing: Items that may be disbursed at the closing table include:
- Permit costs (permits must be obtained before work commences)
- Draw Management Fee
Remaining Draws Process: All other financeable improvement costs and fees will be deposited in the renovation escrow account and disbursed as described below:
- Inspections must occur before escrow draws are made to ensure work is being completed in accordance with plans and specifications
- Funds are released to you and General Contractor only when any given renovation work has been completed
- General Contractor to identify number of draws needed, payable upon completion of work
- A ten percent (10%) holdback will apply to all progress, or interim, draws
- Final draw will be paid-in-full and will include all previously withheld ten percent (10%) holdbacks, along with any outstanding contingency requests or change orders
- Appraiser inspects property to identify the percentage of work complete to date for each draw request. Appraiser must complete final inspection
- Checks will be made payable to you and contractor (i.e., dual-party checks)
There are many different types of renovation loans: conventional renovation loans through Fannie Mae® (“FNMA”) and Freddie Mac® (“FHLMC”), FHA renovation loans, USDA renovation loans, a VA renovation loan option, and portfolio renovation loans.
Below is a high-level overview of the renovation loans Diamond Residential Mortgage Corporation offers. For more information, explore FAQs and Blog.
Keys To Success:
- Inquire early! If you attempt to place an offer on a property that is listed for sale without a pre-qualification letter, your offer may be rejected and you may miss a window of opportunity. It is best to secure financing before you are too far into the buying process.
- Make sure your contractor is on board with the contractor qualifications, bid requirements, and draw process required for your loan type.
- If a Consultant is involved, meet together at the property with the contractor, so all parties can finalize the scope of work together.
- Provide requested paperwork quickly to meet contract deadlines. Time lost on the front end of a deal oftentimes cannot be made up on the back end of the deal to hit closing deadlines.
- Be decisive! Decide on the details of your renovation project early and resist the temptation to make changes throughout the loan process. Wavering during the process can cause delays with your closing. Feel confident in pushing forward with the decisions you make at the onset of the transaction. That’s not to say you can’t make changes along the way, but making those changes mid-stream will likely cause delays.
