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Reverse Mortgage Glossary

Reverse Mortgage LESA, Life Expectancy Set Aside

Reverse mortgage LESA pays taxes and insurance for you, so you don't have to.A reverse mortgage LESA, which stands for life expectancy set aside, was introduced as part of the new financial assessment guidelines rolled out by the Federal Housing Administration (FHA) in 2014. The idea behind the LESA is to help reverse mortgage borrowers with bruised credit or limited income to stay current with payments for property taxes and insurance (which is an important requirement of the HECM reverse mortgage program).

Setting up a LESA involves carving out a chunk of the principal limit (the total pool of cash available) into a set aside that is preserved solely for the payment of property charges. The exact amount of the carve out varies widely from borrower to borrower because it is based on age and how much property taxes and insurance cost.

If property charges are low, the total reverse mortgage LESA carve out tends to be low. If property charges are high (such as in areas where property taxes are high), then the LESA can be a pretty substantial portion of the loan proceeds.

It’s possible that a LESA can make a reverse mortgage completely unworkable. If the home has a high mortgage balance, it’s possible there isn’t enough left in the principal limit to create the LESA. In such a case the loan would be short to close, which means means the borrower would have to come up with cash to make the numbers work.

When a Reverse Mortgage LESA is Required

To avoid a LESA (and to qualify at all, for that matter), applicants must demonstrate both of the following:

  • willingness to keep up with financial obligations (based on a credit analysis).
  • A financial ability to keep up with financial obligations (based on income analysis).

If an applicant fails one of these tests, they are considered a greater risk of failing to keep up with required property charges. To reduce the risk of default, FHA requires the lender to set up a LESA to ensure that required property charges are paid for the borrower’s remaining estimated lifespan.

Financial Willingness

If the borrower has excellent credit, they’ve already demonstrated a financial willingness to keep up with financial obligations. It’s a good bet a LESA will not be required due to credit.

If the borrower has a few dings on credit, it’s still possible they can avoid a LESA as long as the dings aren’t too serious. A 30-day late payment on a credit card here or there usually doesn’t cause any issues. However, if there’s 30-day lates or worse for mortgages or installment loans, a LESA may be required unless the borrower can document an extenuating circumstance that led to the bad credit.

Financial Ability

Lenders determine your financial ability by calculating your residual income, which is essentially the income leftover after your monthly obligations are paid.

Residual income is calculated by adding up all of your monthly qualifying income and deducting debt payments (excluding mortgage payments to be eliminated by the reverse mortgage), monthly property charges (property taxes, homeowner’s insurance, HOA dues, etc.), and estimated utility costs based on the square footage of the home.

The leftover residual income must meet a certain threshold based on the region you live in and the number of people living in the home. If residual income comes up short, it’s possible to make up for it and still qualify using compensating factors.

If compensating factors are applied and the residual income is still short of the requirement, the lender may still approve the loan with a LESA – as long as the residual income isn’t too short.

If the residual income is still really short after applying compensating factors, it’s possible the loan may not be approved.

How a Reverse Mortgage LESA is Calculated

The LESA set-aside amount is calculated to cover required property charges for the remainder of the youngest borrower’s life expectancy. For the hardcore numbers geeks out there, this is the formula used to calculate the LESA:

LESA Amount = (1.2 x MPC) × {(1 +) m+1 ‒ (1 +c)} ÷ {c × (1 +c ) m }

The variables are defined as follows:

Basically, the LESA accounts for enough money to cover property taxes, homeowner’s insurance, and flood insurance (if applicable) for the youngest borrowers likely remaining lifespan. The formula also takes into account that such charges will likely increase over time due to inflation.

If there’s not enough money available in the reverse mortgage to cover the entire LESA, the loan will be short to close. In other words, the borrower would need to bring cash to the closing table to make up for the shortage or the loan doesn’t work.

Bruised Credit or Low Income Isn’t Always a Problem

If you’ve had some dings on your credit history in recent years or you have limited income, don’t assume that you won’t qualify for a HECM reverse mortgage. Credit scores don’t matter as a separate qualifying criteria. If you have a lot of collections or chargeoffs on your credit, that’s not necessarily an issue either. The lending guidelines for a reverse mortgage are much more forgiving than a traditional forward home loan. Even people with pretty banged up credit can often qualify just fine for a reverse mortgage even without a LESA.

A LESA Offers Peace of Mind

Some people might see the reverse mortgage LESA as a bad thing, but it’s often very beneficial. Think about it: if you’re seeking a reverse mortgage to reduce your bills, wouldn’t it also be nice to have the property taxes and insurance lifted off your shoulders? Instead of you having to make the payments out of your own income, your home pays them for you.

Not having to worry about tax and insurance payments ever again can add up to a lot of peace of mind. A LESA keeps more of your income in your pocket, which means you have more free cash flow to use for other things.

How Property Charges Get Paid

Many people might try to compare a LESA to an escrow account on a traditional forward mortgage, but they don’t work the same way. The lender isn’t collecting cash in a LESA account for purposes of paying property charges, they’re simply setting aside a portion of your reverse mortgage benefit amount as a line of credit that can be used to pay property charges when they come due. In some cases the lender may pay the property charges on your behalf or they may cut you a check and you can pay them on your own.