What Is a LESA for a Reverse Mortgage?
Explore LESA, a vital component of reverse mortgages that helps manage ongoing property expenses for homeowners.
A reverse mortgage allows homeowners, typically those aged 62 or older, to convert a portion of their home equity into usable funds while retaining ownership of their property. Unlike traditional mortgages that require monthly principal and interest payments, a reverse mortgage defers repayment until the borrower no longer lives in the home as their primary residence, sells the home, or fails to meet loan terms. While no monthly mortgage payments are required, borrowers remain responsible for ongoing property-related expenses, such as property taxes and homeowner’s insurance. To help manage these obligations, a component known as a Life Expectancy Set-Aside, or LESA, may be incorporated into the loan structure.
Understanding LESA
A Life Expectancy Set-Aside (LESA) serves as a protective measure within a reverse mortgage, primarily for Home Equity Conversion Mortgages (HECMs) insured by the Federal Housing Administration (FHA). Its purpose is to ensure mandatory property charges are paid throughout the loan’s term, safeguarding both the homeowner’s occupancy and the lender’s collateral.
LESA requirements arose because some borrowers struggled to pay essential ongoing obligations like property taxes and homeowner’s insurance, leading to defaults. To mitigate this risk, the Department of Housing and Urban Development (HUD) implemented financial assessment requirements for HECM loans. A LESA is often mandated when a borrower’s financial assessment indicates potential difficulty in consistently fulfilling these responsibilities. This arrangement helps protect the borrower from losing their home due to unpaid taxes or insurance, which would constitute a default.
LESA Operation
Once established, a portion of reverse mortgage loan proceeds is held in a dedicated account, similar to an escrow account. These funds are earmarked for property taxes and homeowner’s insurance premiums. The loan servicer disburses funds from this account directly to cover these charges as they become due.
The LESA typically covers property taxes and homeowner’s insurance. It may also include flood insurance premiums if the property is in a flood zone, and sometimes homeowner association (HOA) fees. Funds held within a LESA are not for the borrower’s discretionary use; they are solely for these specific property-related expenses. Interest does not accrue on these set-aside funds until used by the servicer. The unused portion of the LESA can grow over time, helping meet future tax and insurance needs.
LESA Assessment Criteria
Determining if a LESA is required and calculating its amount involves a comprehensive financial assessment during the reverse mortgage application. This assessment, mandated by HUD, evaluates a borrower’s financial capacity and willingness to meet ongoing property obligations. Key factors include credit history, with lenders reviewing payment history for prior mortgages, property taxes, and insurance. While a specific credit score is not required, a pattern of delinquencies may trigger a LESA.
The assessment also examines the borrower’s income and monthly expenses to determine their residual income. Lenders assess all income sources, such as Social Security, pensions, and investments, against monthly expenses to ensure sufficient funds for property charges and living costs. If the financial assessment indicates a potential inability or unwillingness to consistently pay these charges, a LESA will likely be required. The LESA amount is calculated based on factors like the youngest borrower’s life expectancy, estimated annual property taxes and insurance, and the loan’s interest rate. This calculation ensures enough funds are set aside to cover these expenses for the borrower’s projected lifespan.