What Is a LESA Reverse Mortgage and How Does It Work?

A Life Expectancy Set-Aside (LESA) is a specific feature within a reverse mortgage designed to manage ongoing property-related expenses. It earmarks a portion of the loan proceeds to cover costs like property taxes and homeowner’s insurance. This mechanism helps ensure the long-term sustainability of the reverse mortgage and provides financial security for homeowners.

Understanding LESA in Reverse Mortgages

A reverse mortgage, most commonly a Home Equity Conversion Mortgage (HECM) insured by the Federal Housing Administration (FHA), allows homeowners aged 62 and older to convert a portion of their home equity into cash. Unlike a traditional mortgage where borrowers make monthly payments, a reverse mortgage does not require ongoing monthly principal and interest payments. However, borrowers must still meet ongoing obligations, including paying property taxes, homeowner’s insurance premiums, and maintaining the home.

The LESA was introduced as a protective measure in 2015 to address instances where borrowers struggled to consistently meet these essential property obligations. Before its widespread implementation, some homeowners faced default risks due to unpaid taxes or insurance, potentially leading to foreclosure. The LESA functions similarly to an escrow account, holding funds specifically for these recurring expenses.

Its primary purpose is to ensure property charges, such as taxes and insurance, are paid consistently and on time. By setting aside a portion of the reverse mortgage proceeds, the LESA helps safeguard both the borrower from losing their home due to non-payment and the lender from potential losses. This system provides an added layer of financial stability.

How LESA Works

The amount set aside in a LESA is determined at the loan’s origination. This calculation considers factors such as the youngest borrower’s age, projected life expectancy, and the estimated annual cost of property taxes and insurance premiums. It also accounts for potential increases in these charges over time to cover inflation. For instance, if annual property expenses are estimated at $5,000 for a borrower with a 20-year life expectancy, a LESA might be calculated to hold around $100,000 to cover these costs over that period.

Once calculated, LESA funds are withheld from the total reverse mortgage proceeds and are not directly accessible to the borrower for other uses. These funds are held in an escrow-like account managed by the loan servicer. As property tax bills or insurance premiums come due, the servicer makes payments directly from the LESA account on behalf of the borrower.

LESA funds do not accrue interest as borrowed funds until they are used to pay property charges. The unused portion may even grow at the same rate as the loan’s line of credit, potentially increasing the available balance. However, LESA funds can be depleted if the borrower lives longer than projected or if property charges increase significantly. In such cases, the responsibility for paying taxes and insurance reverts to the borrower.

Eligibility and Requirements for LESA

A LESA is often a mandatory component of a reverse mortgage for certain borrowers, determined through a financial assessment. Introduced by the FHA in 2015, this assessment evaluates a borrower’s capacity to meet ongoing financial obligations associated with homeownership, ensuring they can maintain their property and pay recurring charges.

Lenders examine several criteria during the financial assessment. These include a borrower’s credit history, looking for delinquencies on mortgage payments, property taxes, or insurance. A residual income analysis also assesses if a borrower has sufficient income after covering debts and household expenses to comfortably pay property charges. If these assessments indicate a potential struggle, a LESA is typically required.

Borrowers who meet all financial assessment criteria may still voluntarily opt for a LESA. A voluntary LESA can provide peace of mind, ensuring property charges are managed without direct effort. To complete the financial assessment, borrowers need to provide documentation such as:
Income statements
Asset statements
Recent credit reports
Proof of timely payment for current property charges

Applying for a LESA Reverse Mortgage

The application process for a reverse mortgage that may include a LESA begins with a mandatory counseling session. This counseling, required by the U.S. Department of Housing and Urban Development (HUD), must be completed with a HUD-approved counselor. The session ensures prospective borrowers fully understand the features, costs, and implications of a reverse mortgage, including how a LESA might impact their loan proceeds and responsibilities. All individuals on the home’s deed are required to participate.

After counseling, borrowers choose a reverse mortgage lender and initiate the formal application. During this phase, the lender conducts the financial assessment, which determines if a LESA is required or if the borrower has the option to decline it. A qualified underwriter reviews the provided information and documentation.

If a LESA is required or voluntarily chosen, its establishment is finalized at loan closing. A specific portion of the reverse mortgage proceeds is set aside in the LESA account. Following closing, the loan servicer manages the LESA account, receiving notifications for property tax bills and insurance premiums and disbursing payments directly from the funds as they become due. Borrowers receive statements detailing these transactions, allowing them to track the LESA account activity.