VA Energy-Efficient Homes and HERS Scores in Residual Income Underwriting

The VA's approach to energy-efficient homes and the HERS score is a critical consideration for brokers working with VA loans. The VA HERS score energy efficient homes residual income rule, as detailed in VA Circular 26-25-7, provides a framework for how energy efficiency can influence underwriting decisions. Understanding these guidelines is essential for brokers to ensure accurate loan approval processes.

How does the HERS score impact VA loan underwriting?

The Home Energy Rating System (HERS) score is a measure of a home's energy efficiency. According to VA Circular 26-25-7, lenders can use a property's HERS score to assess potential utility savings, which can be factored into the residual income calculation for VA loans. This consideration allows for a more comprehensive evaluation of a veteran's financial capacity to afford a home, potentially easing the path to loan approval.

What are the requirements for using a HERS score in underwriting?

To incorporate a HERS score into the underwriting process, the energy efficiency report must meet specific criteria:

• The report should be based on actual testing of the property, referred to as a confirmed report.
• The report must not be older than 12 months at the time of loan closing to ensure accuracy in projected savings.
• The family size must not exceed the number of bedrooms in the property plus one, as exceeding this ratio disqualifies the compensating factor consideration.

These requirements ensure that the energy efficiency data used is both current and relevant, providing a reliable basis for adjusting residual income calculations.

How should brokers document energy efficiency considerations?

When utilizing energy efficiency as a compensating factor, brokers must document this clearly. As outlined in VA Circular 26-25-7, the justification for loan approval, including how utility savings were considered, should be noted in the "Remarks" section of VA Form 26-6393, Loan Analysis. Additionally, a copy of the energy efficiency report must be retained in the loan file. This documentation is crucial for compliance and future reference.

What are the practical benefits for veterans?

Incorporating the HERS score into residual income calculations can offer significant benefits for veterans. By recognizing potential savings from energy-efficient homes, the VA loan process can become more accommodating. This approach not only supports veterans in securing homes that are cost-effective to maintain but also aligns with broader sustainability goals.

What should brokers do to apply these guidelines effectively?

Brokers should take the following steps to apply the VA's guidelines on energy-efficient homes:

1. Educate Clients: Inform veterans about the potential benefits of energy-efficient homes and how a HERS score can positively impact their loan application.
2. Stay Updated: Regularly review updates to VA guidelines, such as VA Circular 26-25-7, to ensure compliance and take advantage of any changes.
3. Collaborate with Energy Assessors: Establish relationships with certified energy assessors to facilitate timely and accurate energy efficiency reports.
4. Document Thoroughly: Ensure all considerations and justifications related to energy efficiency are meticulously documented in the loan file.

By integrating these practices, brokers can enhance their service offerings and improve the likelihood of successful loan approvals for veterans.

For more on agency mortgage guidelines, see the Agency Guidelines hub.

This article is for informational purposes only and is not professional advice. Always verify against current guidelines before making decisions.