The reverse mortgage LESA is often viewed negatively by homeowners and industry professionals. This is unfortunate, because the LESA provides a lot of benefit and financial security for many homeowners.
The reverse mortgage LESA is intended primarily to help homeowners with bruised credit and/or limited income to stay current on their property taxes and homeowner’s insurance.
Sadly, many people view the LESA almost like a penalty for having less than perfect credit. I disagree! In my opinion, a LESA is a great reverse mortgage feature because it eliminates the headache of having to save up for property taxes and homeowner’s insurance. This offers a lot of savings and peace of mind for many homeowners.
You probably have a lot of questions about the LESA. We’ll cover what it is, how it works, when it applies, and the potential benefits of a LESA. But before we do that, let’s first cover some basics about how a reverse mortgage works. There’s a lot of misinformation out there about reverse mortgages.
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First, a Few Basics
A reverse mortgage is a unique home loan that offers homeowners 62 and older access to home equity without giving up home ownership or taking on a mortgage payment.
The most popular reverse mortgage today is the FHA-insured home equity conversion mortgage, or HECM (commonly pronounced heck-um by industry insiders). The HECM was signed into law by President Reagan as part of the Housing and Community Development Act of 1987.
No monthly payments are required as long as at least one borrower (or non-borrowing spouse) lives in the home and pays the property taxes, homeowner’s insurance, and HOA dues (if applicable).
You remain the owner of your home and you’re free to leave it to your heirs. Your heirs will inherit the equity in your home whether they choose to keep it or sell it.
The HECM is non-recourse, which means FHA will cover any shortage if your home isn’t worth enough to pay off the entire balance.
The HECM is flexible and customizable; your lender can tailor it to your individual financial goals and needs. You can take the proceeds as a lump sum, line of credit, monthly income, or some combination of these options.
Seniors commonly use the proceeds to eliminate existing mortgage or other debt payments, fund home improvements and repairs, pay medical bills, supplement income, and supplement retirement assets.
If you’d like more information about how a reverse mortgage works, check out the video below.
Who or What is LESA?
The reverse mortgage LESA was added to the HECM reverse mortgage in 2014 when FHA rolled out new comprehensive lending guidelines called financial assessment. The new lending standards were designed to reduce defaults due to nonpayment of property taxes, homeowner’s insurance, and HOA dues.
Defaults had been a growing problem since the late 1990s and were causing losses for the FHA insurance fund and bad headlines for the HECM program.
The new guidelines required lenders to evaluate a HECM applicant’s income, credit, and property charge payment history. Applicants who struggled to pay bills on time and/or had very limited income were considered to be a higher default risk. To mitigate this risk, FHA introduced the LESA, which is designed to pay property taxes and homeowner’s insurance on the homeowner’s behalf.
“But wait, I heard that with a reverse mortgage, borrowers must always pay property taxes out of their own pockets.”
Yes, you must pay property taxes, but not always out of your own pocket. If you don’t have a LESA, than you must pay the property taxes on your own to remain in good standing. If you have a LESA, the reverse mortgage will pay the property taxes (and homeowner’s insurance) on your behalf.
How a LESA Works
The LESA name meaning is life expectancy set aside. In other words, part of the proceeds for a LESA reverse mortgage are set aside and dedicated to paying property taxes and homeowner’s insurance for the rest of your estimated life expectancy (based on government life expectancy tables).
The reverse mortgage LESA is set up as a line of credit that has a zero beginning balance. The lender taps into the line of credit over time to pay your property taxes and homeowner’s insurance on your behalf when they come due.
Remember, to remain in good standing, you must live in your home and pay your property taxes, homeowner’s insurance, and HOA dues (if applicable). The LESA has the first two covered, but you’ll need to continue paying the HOA dues on your own. HOA dues are never included in the LESA.
The exact amount of the LESA varies from borrower to borrower because it is based on age and the cost of your property taxes and homeowner’s insurance.
If your property charges are low and/or you’re an older borrower, the total set aside tends to be low. If the property charges are high (such as in areas with high property taxes) and/or you’re on the younger end of the age spectrum, the LESA can take up a substantial portion of the loan proceeds.
Many people attempt to compare a reverse mortgage LESA with a “forward” mortgage escrow account, but they work differently. A reverse mortgage lender doesn’t collect cash in a LESA for purposes of paying your property charges. The lender simply sets aside a portion of the proceeds into a line of credit that is used to pay the property charges when they come due.
Yes, it’s possible that a LESA can make a reverse mortgage completely unworkable. I think this is why many people view the LESA negatively. For example, if you have a high mortgage balance, there may not be enough money available in the reverse mortgage to create the LESA. The reverse mortgage would be short-to-close, which means you would need to pay down your existing mortgage balance before the reverse mortgage could work.
Is it pronounced less-a or lee-sa? The LESA pronunciation you’ll hear most industry professionals use is lee-sa.
When is a LESA Required?
A LESA reverse mortgage is designed to help homeowners with bruised credit and/or limited income to stay current on property taxes and homeowner’s insurance. However, you can choose to opt-in to a reverse mortgage LESA even if you have great credit and income.
Lenders look at two main criteria to determine if a LESA will be required:
- Financial willingness – The lender will determine if you show a “willingness” to keep up with financial obligations based on an analysis of loan and property charge payment histories. Minor dings such as a few 30-day late credit card payments here or there aren’t usually an issue. However, if you’re very late on mortgages or installment loans or have major derogatory credit such as collections, charge offs, foreclosures, bankruptcies, etc., the lender may require a LESA. You may be able to avoid a LESA if you can document an extenuating circumstance that led to the bad credit.
- Financial ability – The lender will determine if you have the “ability” to keep up with financial obligations, including property charges, based on your income and expenses. Lenders determine your financial ability by calculating your residual income, which is essentially the income left over after your monthly obligations are paid. The leftover residual income must meet a certain threshold based on region and the number of people living in the home. If the residual income comes up short, it’s possible to make up for it and still qualify using certain compensating factors.
If your application doesn’t meet the financial willingness or financial ability requirements, the lender may only approve your application with a LESA.
Basic LESA definition: A portion of the reverse mortgage proceeds that is set aside and dedicated to paying your property taxes and homeowner’s insurance for the rest of your life based on government life expectancy tables.
How a LESA is Calculated
The LESA set-aside amount is calculated to cover an applicant’s property taxes and homeowner’s insurance for the remaining life expectancy of the youngest borrower or non-borrowing spouse.
For the hardcore numbers geeks out there, this is the formula used to calculate the LESA:
LESA Amt = (1.2 x MPC) × {(1 +) m+1 ‒ (1 +c)} ÷ {c × (1 +c ) m }
The variables are defined as follows:
- MPC = Monthly property charges
- c = (Annual expected interest rate (EIR) + 1.25%) / 12
- m = Life expectancy of youngest borrower in months (based on Loan Period 2 in the Assumed Loan Periods for Computations of Total Annual Loan Cost Rates)
The LESA incorporates enough money to cover property taxes, homeowner’s insurance, and flood insurance (if applicable) for the youngest borrower’s (or non-borrowing spouse’s) estimated remaining lifespan.
The formula also takes into account that property charges tend to increase over time due to inflation.
It’s important to understand that a LESA is not guaranteed to pay the property charges for the rest of your life. It is possible that a LESA can run out of funds if you live longer than expected or your property taxes and homeowner’s insurance increase more than expected.
If the LESA runs out, you’ll need to once again pay the property taxes and homeowner’s on your own to remain in good standing.
“I heard that a LESA will only pay for taxes and insurance for the first three years of the HECM.”
Not at all. The funds are designed to last for the rest of the youngest borrower’s expected life span based on government life expectancy tables.
The Partial LESA
There is such thing as a partial LESA, but they’re pretty rare. In all my years in the reverse mortgage industry, I never had a single client get a partial LESA.
The partial LESA is (theoretically) designed for applicants who are slightly short of the residual income requirements. Instead of setting aside a full LESA that pays the entire cost of the property taxes and homeowner’s insurance, the lender sets aside a smaller amount that pays a portion of the property taxes and homeowner’s insurance. This reduces the size of the LESA and frees up proceeds that would have been eaten up by a full LESA.
When property taxes and homeowner’s insurance come due, the lender sends you a partial payment for the property taxes and homeowner’s insurance. You make up the rest out of your own pocket and send the full payments to your county and homeowner’s insurance company.
Is a LESA required for a reverse mortgage?
Not always. If you have bruised credit, extremely limited income, or have been late on property taxes, homeowner’s insurance, or HOA dues (if applicable), a LESA may be required.
What would require a borrower to have a LESA?
A LESA may be required if you have significant derogatory items on credit, extremely limited income, or have been late on property taxes, homeowner’s insurance, or HOA dues (if applicable).
Who pays the taxes on a partially funded LESA?
The lender issues funds from the LESA to the homeowner, then the homeowner pays the property taxes.
What is a life expectancy set aside LESA?
A LESA carves out a portion of the reverse mortgage proceeds to pay property taxes and homeowner’s insurance on the homeowner’s behalf for the rest of their expected life span (based on government life expectancy tables).
What is a reverse mortgage LESA set aside?
A LESA carves out a portion of the reverse mortgage proceeds to pay property taxes and homeowner’s insurance on the homeowner’s behalf for the rest of their expected life span (based on government life expectancy tables).
Can I opt-in voluntarily for a LESA set aside?
Yes, you can voluntarily elect to have a LESA set up on your reverse mortgage.
