An Energy Efficient Mortgage, or EEM, may provide home buyers with the ability to qualify for a larger loan than a traditional mortgage loan. Whether the purchase is a new or existing home, one that is already energy efficient or one that the buyer will make energy efficient following the purchase, the idea behind the EEM is simple.

A more energy efficient and therefore more affordable home enables you, the home buyer, to qualify for a larger loan. The EEM accounts for the home owner spending less money on energy consumption and applies that savings as income in underwriting the loan. Case in point: A mortgage customer with a gross income of $50,000 might qualify for a $187,000 home with a traditional mortgage loan, but with an EEM loan that figure could increase to a borrowing capacity of $202,000!

Qualifying for an Energy Efficient Mortgage is similar to qualifying for a traditional conforming mortgage. The underwriter considers the mortgage applicant’s credit score, debt to income ratio, ability to repay the loan, etc. – just like a traditional loan. The application process differs in that it begins with a HERS (Home Energy Rating System) report on the existing home or the plans of the new home being built. With new homes, the report identifies how energy efficient the home is, while with existing homes, the report identifies how the home’s energy efficiency can be improved through the installation of energy saving features.

For existing homes, the cost of the proposed efficiency updates can actually be financed through your EEM loan. When the HERS report is presented, it details the current energy efficiency of the home and provides a checklist of improvements that can be made to improve the home’s energy efficiency. Consumers can then borrow up to 15% of the home’s appraised value in order to make the energy efficient improvements. For a home that appraises at $200,000, you could finance up to $30,000 for energy efficient upgrades!

The important thing to understand about Energy Efficient Mortgages is that can potentially help borrowers leverage a slightly larger loan amount than they might otherwise qualify for. EEMs don’t necessarily impact the interest rate on the loan: As with any mortgage, the interest rate is tied to a buyer’s credit score. That said, there is a effort undertaken by the Energy Programs Consortium to enhance EEM products by offering reduced rates, but as of this writing that has not yet materialized.

Thus, the benefit of the current structure of Energy Efficient Mortgages EEM lies in the debt to income ratio adjustments that result from the underwriting process in an Energy Efficient Mortgage. The incentive for homebuyers to utilize EEM’s comes from realizing the benefit of lower utility bills, being able to qualify for a more expensive home and knowing that their home’s carbon footprint is as small as it can be.

Unethical lenders will often lie about the following topics:

1. “Locking in market rates” - When you lock in a rate, it should be the market rate on the day that you lock. However, an unethical lender might lock you in at a rate above the market rate, trusting that you won’t find out. The availability of rates on the Internet has made this practice more difficult, and you should use the web to protect yourself: ask the lender if they have a website where they post their rates each day, and check other websites, like Loan.com, to see if rates move between the day of your quote and the day of your lock.
2. “Having to do an ARM” - An unethical broker or lender might tell someone that they need to get an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage (FRM) for self-serving reasons. Some brokers or loan officers get a bigger cut on ARMs than FRMs, and they could be letting that profit motive influence their advice to you. To avoid this problem, make sure the broker or lender lays out the exact reasons why you wouldn’t qualify for an FRM (e.g., too low a FICO score, too little income relative to housing expense).
3. “Cost-free loans” - An unethical lender might tell you that you can get a loan with no settlement costs — a “cost-free” or “no-cost” loan. Don’t believe that lender. There are always settlement costs. What is really happening is that those costs are being bundled into the loan amount, or the lender is picking up the tab on the settlement costs in exchange for a higher rate. Both are perfectly acceptable ways to structure a loan, but you shouldn’t kid yourself that you’re getting away without paying settlement costs. And you should be sure to include those indirect ways of paying settlement costs in your “cost-free” loan when you stack it up against other loan offers.
4. “Settlement costs are non-negotiable” - Some lenders will have you believe that fees for all of the various settlement activities — document preparation, couriers, appraisals, credit reports, flood certification reports — are locked in stone. That’s not true. You should press your lender to justify and explain every fee, compare fees to see if one lender charges more than another, and try insisting that some or all of those fees be reduced. Just because these fees seem small compared to the property price, don’t swallow them without a challenge!
5. “Prepayment penalties” - An unethical lender might lie when saying that a loan carries no penalty for paying it off early. They say it to make the loan seem less restrictive and more attractive - especially for those who think they might refinance one day, which requires prepayment of your initial loan. But the only way to know for sure whether there’s a prepayment penalty is to check the Truth in Lending disclosure form that you receive as part of the mortgage process.

The Truth in Lending laws were passed by Congress in 1969 and are part of the Consumer Credit Protection Act. They require anyone who extends credit to a consumer to fully disclose the credit terms, including:

• How finance charges were computed
• The annual percentage rate
• The total finance charge over the life of the loan
• Payment schedule and total number of payments that will be made over the life of the loan
• Prepayment penalties (if any)
• Late payment terms
• If you have an adjustable rate mortgage (ARM), the lender must disclose the maximum interest rate that can be charged.
• When and how finance charges are imposed

These things must be disclosed up front, in writing, and in terms that are easy to understand.

In addition, the real estate section of the Truth in Lending Act gives consumers something called a “Right of Rescission” on refinancing and line of credit transactions. It means that you have three business days (from the date you sign the agreement) to back out of a loan, no questions asked. The lender cannot charge you any kind of cancellation fee.

The purpose of Truth in Lending Laws is to ensure that consumers make informed decisions regarding extensions of credit. While creditors are required to disclose certain information, it’s still the consumer’s responsibility to research creditors and credit terms.

Recent headlines about the troubled subprime lending industry are making Americans more aware of the consequences of risky lending practices. But unscrupulous lenders and scam artists continue to prey on unsuspecting loan shoppers and homeowners.

Unfortunately, loan-related scams aren’t restricted to tricking consumers into loans with outrageously high interest rates. Today’s sophisticated scammers are using loans as a vehicle to do everything from stealing sensitive personal information to virtually stealing a credit-challenged homeowner’s own home. The mortgage experts at Loan.com have identified five top scams that all consumers - mortgage shoppers and homeowners alike - should be on the look-out for.

1. Unsolicited phone calls
Americans across the country have reported receiving phone calls from telemarketers posing as representatives from well-known organizations such as Fannie Mae offering to refinance loans at low rates. These “representatives” often ask for personal information, claiming they need it to qualify a victim for a loan. This information is then used to steal a victim’s identity.

Loan.com’s Advice: Be wary of any phone call offering remarkably low interest rates on loans, especially if you have registered your phone number with the Do Not Call Registry. Most major nationwide lenders do not solicit business over the phone. Never give out personal information over the phone unless you are absolutely sure who you are speaking with.

2. “Helpful” contractors
Many homeowners have reported contractors – often roofing or remodel professionals – approaching them with an offer to perform upgrades on their home at a reasonable price. These contractors offer financing through low-interest loans. It’s not until after signing numerous forms that too many homeowners realize they have signed off on a high-interest home equity loan, and that the contractor has been hired by unscrupulous lenders to sell loans, not improve homes.

Loan.com’s Advice: It’s fine to make improvements to your home, but do so on your own terms. A contractor appearing on your doorstep out of the blue should be a red flag, as should high-pressure sales pitches that focus on “easy” financing options.

3. Unexpected change of lenders
With the lending industry constantly evolving, it’s not uncommon for a mortgage to get transferred to a different lending agency more than once over a period of years. But some homeowners have received official-sounding but fraudulent letters informing them that their mortgage has changed hands and instructing them to mail payments made out to a new organization to a new address.

Loan.com’s Advice: Always confirm any major mortgage payment changes with your current lender. Many organizations will notify you of upcoming changes months in advance, and will provide contact phone numbers and Web resources for more information. Be skeptical of any unexpected letter telling you to immediately mail payments to a different location or organization.

4. “Rescue” agencies
Scam artists are using public records to identify homeowners facing foreclosure. They then approach desperate homeowners with an offer to help them out of their financial situation by signing deeds transferring the title of the home to an “interested buyer” for a short period of time. In reality, the transfer is permanent and the “buyer” is fraudulent, often created out of a stolen identify. The “buyer” takes out a second loan for the current value of the home and pays off the original mortgage, keeping the difference. The “buyer” then disappears and stops making payments on the second loan, throwing the home into foreclosure and leaving the original homeowner with nothing.

Loan.com’s Advice: If you’re facing foreclosure, contact your lender to review all of your options. Be extremely wary of any unsolicited individual or agency that appears with promises to help you out of your situation – especially if it involves transferring titles.

5. “We finance anyone!”
The classic predatory loan, mostly targeted at people who don’t yet own a home. Often advertised in newspaper ads, on fliers posted on telephone poles, and online through banner ads and spam e-mail, these lenders provide loans to credit-challenged consumers at extremely high rates. Many of these lenders expect homeowners to eventually be unable to make payments, allowing lenders to seize homes or refer homeowners to an affiliated second predatory lender.

Loan.com’s Advice: Though unethical, these predatory loans are legal. Be absolutely sure you are financially prepared to purchase a home. When you’re ready, check with agencies such as the FDIC, the Federal Reserve Board of Governors, and use resources like the ones on this site and BestRate.com to find a verified lender.

As foreclosures increase in America, a new breed of criminal is on the rise - the predatory lender. Predatory lenders target specific groups; the elderly, immigrants, and people struggling to pay bills are all at risk.

When dealing with any lender, there are some red flags that may indicate you are dealing with a predatory lender:

• They may ask you to falsify information on loan documents.
• Avoid lenders that attempt to get you to borrow more than you need.
• Predatory lenders will try to get you to accept payments you cannot make.
• The lender will fail to provide loan disclosures, or ask that you not read them.
• The lender will ask you to sign forms, and tell you he will fill them out later.
• The predatory lender will tell you one set of terms when you apply, and then present another set of forms with no explanation.
• These lenders are reluctant to give you copies of forms you have signed.
• Predatory lenders will often misrepresent the type of credit you are given i.e. offering you a line of credit, when you are actually getting a one-time loan.

People seek loans for a variety of reasons; home equity, bill consolidation, or you just need to stave off foreclosure. With any loan, be very leery of sales pitches that promise you financial relief even if you have no job, are behind in your bills, and have failure to pay. They will give you a loan with unacceptable payments, and then foreclose on your home. Always avoid signing any form with blank spaces, which can be filled in later, allowing the predatory lender to make changes against your approval. Avoid any lender that charges a high application fee. Be sure you understand everything on any form before you agree to sign.

The elderly are especially susceptible to subprime lenders. They generally have high equity in their homes, and are usually living on a fixed income. The typical subprime lender is a person who provides credit to those with past credit problems. These predators market to people with “B” and “C” credit ratings. Although subprime lending is a good for the market, it is often seen as a predatory tactic.

Remember, predatory lenders are looking for people with an inability, not ability, to pay. Always insure you are not falling into these traps set by predators. Counseling on credit and loans is always available. Seek guidance from friends or neighbors who have had experience with them. In addition, many local housing departments offer assistance and guidance on borrowing.