Short answer: an FHA energy efficient mortgage (EEM) lets you add the cost of cost-effective energy improvements to an FHA loan when you buy or refinance. You get a home energy assessment first, and the financed improvements must save more energy, in today’s dollars, than they cost. HUD limits the add-on to the lesser of the cost-effective package or 5 percent of the lowest of three values, and the lender figures the base loan and your debt ratios before the add-on. This page covers federal law only; other rules may apply where you live. It is general information, not legal or financial advice.
The law behind it
The Energy Policy Act of 1992 told HUD to set up an energy efficient mortgage pilot program for FHA-insured loans, to promote buying energy efficient homes and installing cost-effective improvements, and then to expand it nationwide (12 U.S.C. 1701z-16(a)-(b), LII, read October 30, 2026). The statute caps the cost of the improvements at the greater of 5 percent of the property value (up to 5 percent of the FHA loan limit in 12 U.S.C. 1709(b)(2)(A)) or 2 percent of the limit in 1709(b)(2)(B), and lets the final loan go above FHA loan limits by up to 100 percent of that cost when you ask before the base loan is funded (1701z-16(a)(2)(C) and (a)(3)(A); LII: 12 U.S.C. 1709). HUD’s Handbook, below, sets the formula lenders use today.
What HUD requires
HUD Handbook 4000.1, II.A.8.c, Energy Efficient Mortgages, dated April 29, 2019 (HUD, Update 18 issued August 12, 2026, read October 30, 2026; this page may be out of date), says:
| Topic | HUD rule |
|---|---|
| Loans | Any FHA Title II loan, including 203(b) purchase and no cash-out refinance, 203(h) for disaster victims, and 203(k) Standard and Limited |
| Homes | New and existing 1 to 4 unit homes, one condominium unit, and manufactured housing |
| Energy package | The improvements you choose from a qualified energy rater’s recommendations; it can include equipment, solar and wind technology, materials, labor, inspections and the assessment itself |
| Cost-effective test | The cost of the improvements, including maintenance and repair, must be less than the value of the energy saved over their estimated useful life |
| New construction | Only improvements beyond the higher of the energy code HUD has adopted by Federal Register notice or the local building code count |
| Assessment | A whole-home assessment by a certified rater, assessor or auditor; the report may not be more than 120 days old |
| Cash back | None; any excess goes to the loan principal |
| Completion | Within 90 days of disbursement (203(k) follows its own escrow rules); otherwise the funds prepay principal |
How much can be added
The Handbook says the limit on what you can add to the base loan amount is the lesser of the cost-effective package from the energy audit, or 5 percent of the lowest of: the adjusted value, 115 percent of the median area price of a single family home, or 150 percent of the national conforming mortgage limit. The lender figures the initial maximum base loan without the energy package, then adds the package; the add-on may take the loan above the FHA loan limit for the area. Your debt ratios are figured on the initial base loan and its share of the upfront mortgage insurance premium. If the appraisal includes the value of the energy package, that value is subtracted to get the adjusted value, and for new construction the package cost is subtracted from the sales price. The lender runs the numbers in HUD’s EEM calculator.
Example: the add-on and its limit
This example is only for the math, with an example value, package and savings, not terms from any lender. It assumes the adjusted value of $300,000 is the lowest of the three values in HUD’s formula, and an FHA purchase loan at 96.5% of that value.
| Item | Example |
|---|---|
| Initial base loan: 96.5% of $300,000 | $289,500 |
| Energy package from the audit | $12,000 |
| Present value of energy saved over its useful life | $14,500, more than $12,000 by $2,500: passes the cost-effective test |
| 5 percent of $300,000 | $15,000 |
| Add-on: the lesser of $12,000 and $15,000 | $12,000 |
| Final base loan: $289,500 + $12,000 | $301,500 |
| Upfront premium at 1.75% of $301,500 | $5,276.25 |
| If the package were $18,000: add-on capped at $15,000 | $15,000 financed, $3,000 not financed |
The upfront premium rate is from HUD’s current table; see FHA mortgage insurance premiums for the annual premium. A cost-effective package also has to pass on your own budget: ask what the monthly payment rises by.
Using it with a 203(k)
An EEM can be paired with a Standard or Limited 203(k). The energy package items are left out when the lender figures the initial 203(k) base loan, the after-improved value is used for the EEM, and the energy funds go in the rehabilitation escrow. The 203(k) section says energy improvement costs can be in addition to the $75,000 Limited 203(k) cap, and that the base loan may not exceed 110 percent of the after-improved value (100 percent for condominiums) (HUD Handbook 4000.1, II.A.8.a, dated November 10, 2026, which is after our read date, so ask which version applies). See FHA 203(k) rehab loans.
The home energy assessment
The Department of Energy says a home energy assessment, also called a home energy audit, will tell you how much energy you use in your house and guide you on cost-effective measures to improve its energy efficiency, and that a professional assessment is a much more detailed, equipment-based look than one you do yourself (DOE Energy Saver, August 2021, read October 30, 2026; this page may be out of date). For the EEM, HUD lists Building Performance Institute and Residential Energy Services Network credentials, or a rater who meets local requirements, and the report must show the credential.
Other ways to pay for energy upgrades
For solar, compare solar panel financing and personal loans. Property assessed financing is repaid with property taxes and follows different rules; see PACE financing rules.
Questions to ask the lender
- Do you offer the FHA energy efficient mortgage with this loan?
- What is my initial base loan, and what is the limit on what I can add for energy improvements under HUD’s formula?
- Which energy raters meet your requirements, and who pays for the assessment?
- How will the energy funds be held, and who inspects the work?
- What happens if the work is not done within 90 days?
- How much does the add-on raise my monthly payment and upfront premium?
Checklist
- Ask for the EEM before the base loan is funded.
- Get the home energy report and check that it is no more than 120 days old at underwriting.
- Compare the cost of each improvement with its estimated savings in the report.
- Get written bids that match the energy package.
- Finish the work on time and keep the inspection results.
You can submit a complaint at consumerfinance.gov/complaint.
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Sources
- LII: 12 U.S.C. 1701z-16, Energy efficient mortgages pilot program
- LII: 12 U.S.C. 1709, Insurance of mortgages
- HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Update 18, issued August 12, 2026), PDF
- U.S. Department of Energy, Energy Saver: Consumer Guide to Home Energy Assessments (fact sheet, August 2021), PDF
- CFPB: Submit a complaint
Disclosure: Modern Lending Solutions is not a lender, loan broker or agent for any lender or loan broker, and does not make credit decisions. Any compensation we receive is paid by participating lenders, only for advertising services. This guide is general information, not financial or legal advice.