Reverse Mortgage Life Expectancy Set Aside (LESA) Explained

January 22, 2024

A key development in the overhaul of HECM guidelines was the introduction of the LESA. This requirement is a response to past challenges where borrowers, after receiving a lump-sum equity payment, struggled to meet essential obligations such as homeowners insurance, property taxes, and home maintenance to FHA standards, leading to defaults.

The LESA is designed to ensure that property charges are managed effectively, safeguarding borrowers from the risk of default.

Table of Contents

• The Security of a LESA with a Reverse Mortgage

• Strategizing: The Advantages of a LESA in Reverse Mortgages

• Empowering Financial Independence: Betty’s Example with LESA

• Set-Aside FAQs

The Security of a LESA with a Reverse Mortgage

The Life Expectancy Set Aside (LESA) is revolutionizing how borrowers approach reverse mortgages, offering a new layer of financial security and stability. Functioning similarly to an escrow account used in traditional forward mortgages for taxes and insurance, LESA is tailored based on the borrower’s age and life expectancy.

This approach ensures that funds such as homeowners insurance and property taxes are allocated for future payments, thereby mitigating the risk of borrower defaults.

For some, a LESA is a mandatory component based on their financial assessment results, but others may opt to incorporate it voluntarily into their reverse mortgage strategy. This flexibility allows borrowers to align LESA with their specific financial needs and circumstances.

Incorporating a LESA into a reverse mortgage plan can be a game-changer, especially for new borrowers who might have reservations about reverse mortgages. It addresses common concerns by ensuring that essential expenses are covered, thus offering peace of mind.

Strategizing: The Advantages of a LESA in Reverse Mortgages

The concept of a Life Expectancy Set Aside (LESA) in reverse mortgages might seem like it reduces your initial proceeds, but it’s a strategic move for long-term financial peace.

This approach is particularly advantageous for borrowers cautious about meeting ongoing loan obligations, such as taxes and insurance payments.

Family members of reverse mortgage borrowers often advocate for a Tax and Insurance LESA. Their primary goal is to ensure their elderly parents can enjoy their retirement without the stress of these financial responsibilities.

Empowering Financial Independence: Betty’s Example with LESA

Consider the story of Betty, a homeowner born in 1932, who enjoys the comfort of her $750,000 home, which she owns outright, free from any mortgages.

Betty faces the common concern of managing ongoing property taxes and insurance, which amount to $218.71 monthly. As she contemplates making some enhancements to her home, Betty decides to tap into her home’s equity through a reverse mortgage, aiming to withdraw $50,000 upfront for the renovations.

Betty values her independence but is not immune to the stress of keeping up with regular tax and insurance obligations. Recognizing this, her son proposes a solution to alleviate her worries: incorporating a Life Expectancy Set Aside (LESA) into her reverse mortgage plan.

By allocating $18,847 to a LESA, Betty finds a way to safeguard her future. This strategic decision not only grants her the financial flexibility to make the desired home modifications but also removes the fear of failing to make mandated tax and insurance payments.

Opting for a LESA allows Betty to maintain her financial independence and focus on the joy of improving her home, secure in the knowledge that her ongoing property charges are covered.

Set-Aside FAQs

What is a reverse mortgage LESA set aside?

The LESA is a Life Expectancy Set Aside. These are funds set aside from your line of credit and not made available to you that the servicer uses to pay your taxes and insurance when due. They are not borrowed funds until you use them to pay property charges, so you do not accrue interest on the funds until they are used, and if you never use the funds, they were never borrowed and did not have to be repaid.

How does a LESA benefit me?

If your reverse mortgage has a LESA account, you never have to worry about budgeting for or paying taxes or insurance on your home again. The servicer will make the payments on your behalf, so you do not have to worry about having money available for tax or insurance bills.

How does the LESA growth rate work?

LESA funds are in the line of credit, so the funds experience the same growth rate as other line of credit funds on the unused portion. This allows the lender to withhold less than 100% of the funds you are expected to need at the onset as the funds will grow over time, and that will help meet future tax and insurance needs.

Can I opt-in voluntarily for a LESA set aside?

Borrowers can voluntarily elect to set aside an account to pay taxes and insurance even though most result from HUD requirements due to credit or income issues. It works well for many borrowers, but you must remember that once a LESA has been elected, the borrower cannot later change their mind and drop the account (even if it was voluntarily established).

What is a reverse mortgage repair set aside?

A set aside for taxes and insurance is money set aside for approved repairs at 1.5% of the cost of those repairs until the repairs are completed. Suppose the borrower has a line of credit loan. In that case, they can then use any leftover set aside funds for whatever purpose they desire, but if you have a fixed rate loan and set aside funds are credited back against the loan balance, the borrower cannot take those funds as an additional draw.

If you have a reverse mortgage and fall behind on the taxes, can you get a modification putting the taxes and insurance on LESA?

A reverse mortgage regarding a Life Expectancy Set Aside (LESA) cannot be changed once it is closed. If a LESA is established at the time of loan closing, it will remain in effect for the life of the loan, and a loan without a LESA established cannot have one established later.

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55 Comments on this Article

Sharon
August 23rd, 2024

Good Morning... a few things I need answers to since I'm not getting any help elsewhere. We had our closing on a reverse mortgage in June, and it was never mentioned or explained to me how the interest payments work. I found out two weeks after closing. Yes, we did have the counseling over the phone, but nothing was mentioned.

Then I received a statement showing that $169 was added to the loan. If this happens every month, it'll add up to thousands, and if rates go up, it's going to eat away at all my equity. Our house appraised at $340,000, and we were supposed to get two payouts totaling $90,000. They took $55,000 for a set aside because we were one year behind on taxes, plus the current year.

We made monthly payments and always had our taxes paid. Why couldn't they just let me pay off the taxes and give me my money? I was told I needed extenuating circumstances to do that in the last two years... My husband has Parkinson's, and that was a reason for the loan, but I was told I couldn't use that because the underwriter might not approve the loan! So we ended up with approximately $45,000, and that's it. I need that money.

They've made thousands off of me, and I'm not going to have anything left. To me, this feels like discrimination against my husband and fraudulent regarding the interest. I would never have gone through with this if I knew how the interest would grow every month. Any comments on this that would help me?"
Reply to Sharon
- Michael Branson
  August 23rd, 2024
  
  Hi Sharon,
  The core concept of a reverse mortgage is that the loan doesn't require you to make monthly payments. Instead of making those payments of principal and interest monthly, the interest is added to the loan balance over time. I'm sorry to hear that this wasn't made clear to you from the start, but the growing balance is typically disclosed on every set of documents and amortization schedules provided by lenders and counselors from the beginning of the loan process.
  That said, even though you're never required to make payments with a reverse mortgage, you can choose to make payments at any time. There's no prepayment penalty, so if you want to, you can make payments in any amount, up to and including the full balance, at any time. This allows you to keep the interest from accruing if you prefer to pay the interest instead of allowing it to accumulate and increase the balance.
  The LESA (Life Expectancy Set Aside) is a requirement from HUD whenever borrowers have been late on any property charges in the past 24 months. It can also be required based on other income or credit conditions. If you were behind on your property taxes, the lender would have no choice under HUD's financial assessment requirements but to require the LESA. Even if you had paid the taxes at the time, the requirement would still be in place because of the delinquency within the past 24 months.
  The LESA can be seen as a "double-edged sword." It reduces the amount of money available to you, but it also means you don't have to worry about paying taxes or insurance as they come due; the servicer handles those payments from the set-aside account. Additionally, you don't accrue interest on those funds until the servicer actually sends a payment to the tax assessor or insurance company on your behalf, and only that payment amount is added to your loan balance.
  Under HUD's requirements, no lender could close a reverse mortgage without a LESA in place due to delinquent taxes within the past 24 months. Since 2015, when HUD implemented their financial assessment, delinquent property charges have been a significant issue because HUD was facing billions in losses, much of which was due to borrowers not paying their taxes and insurance. They've since tightened their underwriting requirements for the reverse mortgage program, with special attention to property charges that can become expenses lenders and HUD must cover. While these rules apply to all borrowers equally, the impact can vary depending on individual circumstances, but it's not discriminatory.
  It's difficult to give advice after the fact. The best time to address these concerns would have been when the underwriter approved your loan with the LESA requirement. If the terms didn't work for you, you could have chosen not to close the loan. Even now, you have the option to pay off the loan through a refinance or sale if you feel that's in your best interest. Although it would have been better to make this decision before closing the loan, the option is still available to you. You can also make smaller payments to prevent the balance from growing if that's your preference.
  If those options aren't feasible, you might want to consider alternative solutions. While I don't know the specifics of your situation or the size of your home, some borrowers have successfully rented out a room or rooms. Depending on your location, the rent for a single room can be substantial (if that's something you're open to or if you live in a market where this is possible). It's just a thought. Unfortunately, there aren't many options available after the loan has closed.
  Reply to Michael
Bernadette A.
July 29th, 2024

Hello Michael,

Lots of good info here, thanks.

I am about to enter into a HECM with my domestic partner. He is 75, and I am 80. The deed has both our names. He has the income, so LESA sounds good for taxes and insurance in case he passes away first. I presume no interest is paid on the funds set aside until they are used?

If I pass away first, are there additional fees to get the LESA funds released for his use? Many thanks.
Reply to Bernadette
- Michael Branson
  July 29th, 2024
  
  Hello Bernadette,
  You are absolutely correct that there is no interest accrued on the LESA funds set aside to pay taxes and insurance until the lender actually uses them to pay those expenses. Only the amount sent to the taxing authority or the insurance company will be added to your balance owed at the time the payment is made. If the funds are not used by the time you or your heirs repay the loan, the unused amount is not included in the payoff necessary to repay the loan.
  Now, let's discuss the LESA account itself because you need to ensure it is right for you and your partner now and in the future when choosing whether to establish a voluntary LESA account. The LESA account cannot be dropped later once you set it up. HUD does not currently give borrowers an option to establish a LESA account and then later drop it if they change their minds, even when the account was established voluntarily and not as a condition of the loan approval. It is a set-aside that will last for the life expectancy of the borrower(s). If you believe you might not want it for that long, perhaps you should earmark your own funds in the line to use for the express purpose of paying certain expenses but not utilize a LESA account. As long as you don't use the funds in your line of credit, you also do not accrue interest on the funds, and you will have total control over their disposition and distribution at all times.
  Lastly, remember that the LESA is a "life expectancy" set-aside. Those funds are only calculated to last for the expected lifetime of a borrower, so excessive funds are not placed into each borrower's account who receives a LESA. This means that borrowers can outlive their LESA funds. The LESA funds are meant to help the borrower live in the home for an expected lifetime or at worst, for many years before they ever need to worry about paying taxes and insurance again. However, borrowers need to realize that if they are blessed with longevity, they may need to start paying taxes again at some point, so they need to plan for and save for that eventuality. Just as there may be other repairs on the home at some point in the future, there may also be taxes and insurance payments required again at some point in the future that borrowers need to consider.
  Reply to Michael
  - Eric F.
    August 21st, 2024
    
    If I sell my home and pay off the reverse mortgage, what happens to the set asides when I've never had to use them?
    
    Reply to Eric
    - Michael Branson
      August 23rd, 2024
      
      Hello Eric,
      Unused set-asides are similar to unused line of credit fundsâ€”they're simply money that you never borrowed, so they don't need to be repaid when you pay off the loan. Here's a very simplistic example to make it easier to understand: Suppose you're approved for a reverse mortgage with a maximum principal limit of $200,000, but $30,000 of those funds are set aside to pay future taxes and insurance, leaving you with $170,000 available.
      If you decide to pay off the loan early, you don't automatically owe $200,000 just because that was the maximum loan amount you were approved for. You would only need to repay the money you actually borrowed, plus any interest, mortgage insurance, and fees. For our example, let's say you only used $100,000 of the $170,000 available to you, and the lender only used $5,000 of the set-aside funds to pay your taxes and insurance while the loan was outstanding. The amount required to pay off the loan would be the $100,000 you borrowed, plus the $5,000 used, plus any accrued mortgage insurance, interest, and any fees you financed when you started the loan.
      The Life Expectancy Set Aside (LESA) isn't money that's advanced to you right away and sitting in an account somewhere. It's a portion of your line of credit that the lender sets aside, meaning you cannot use it for other purposes. The funds are only borrowed as the lender makes payments for your taxes and insurance installments. If the lender had funded it all from the start, you would be accruing interest on those funds immediately, but that's not the case.
      There wouldn't be any excess set-aside funds to refund because the lender only uses the funds as needed, sending them directly to your tax assessor or insurance company so you don't have to pay those expenses out of pocket. Think of it like a credit card: if you had a credit card with a maximum credit line of $10,000 and only borrowed $5,000, that's all you would need to repay when you paid off the card (plus accrued interest, of course). You wouldn't be required to pay off the entire $10,000 line of credit, and since you're only required to repay the amount you actually borrowed, there's no refund due to you from the lender, even though you had more credit available.
      Reply to Michael
  - Ann T.
    October 31st, 2024
    
    If anyone is considering PHH for a reverse mortgage, please be aware. If you choose a LESA with PHH, they will not pay insurance and taxes on time. Additionally, they will keep the LESA funds if you pass away or want to pay off your reverse mortgage. The LESA funds, which are your money, will not reduce your payoff amount; PHH retains your LESA funds. I was informed of this yesterday by Vincent, ID 182856, from PHH. I had to pay my home insurance myself after my insurance was canceled. My first call with PHH about the insurance issue was on 9-12-2024, and after multiple attemptsâ€”including 12 phone calls and numerous emailsâ€”they finally reimbursed me on 10-31-2024. I am extremely stressed over the LESA and PHH reverse mortgage situation, which feels like a scam targeting seniors.
    Reply to Ann
    - Michael Branson
      November 4th, 2024
      
      Hello Ann,
      I can't specifically defend or condemn PHH or their actions, as I don't know the full details of what occurred. However, if they agreed to pay your taxes and insurance through a LESA (Life Expectancy Set Aside) and they paid late, resulting in any expense or negative repercussions for you, you have recourse. There are several actions you can take, including seeking legal representation or filing complaints with your state consumer department, the CFPB (Consumer Financial Protection Bureau), and the FTC (Federal Trade Commission). These agencies exist to protect consumers, and it costs nothing to reach out to them.
      I believe I can help clarify the LESA issue regarding unused funds. Many people think there is a separate pool of funds or an account that the lender holds, which borrowers should get back if the loan is paid off, but that's not how LESA works. With a LESA, a specific amount of your line of credit is "set aside" or not made available to you, so the lender can draw from these funds as needed to pay your taxes and insurance. The funds remain unused in the line of credit and are not borrowed until the lender sends them to your tax assessor or insurance company. Only then is that amount added to your loan balance. Therefore, if you pay off the loan early, there are no funds sitting in an account to be refunded, but since you never borrowed them, you also don't have to repay any portion of the LESA that you didn't use.
      Let's use a simple example to illustrate. Suppose you had a reverse mortgage for $200,000, but $40,000 was set aside to pay taxes and insurance, leaving you $160,000 to use as you wish. After 5 years, you decide the home no longer suits your needs. Your loan balance, including accrued interest and funds the lender paid for taxes and insurance, is $100,000, and the lender has only paid $15,000 for taxes and insurance. You would repay the loan balance and any accrued interest (including mortgage insurance as part of that balance), but there would not be a $25,000 account of unused LESA funds refunded to you. You simply didn't use the money, so that amount does not need to be repaid since it was never borrowed.
      Since the LESA account is not your personal funds but part of the line of credit you haven't yet accessed, the lender cannot offset what you owe with more borrowed funds. Each dollar taken from the line of credit increases your balance, as LESA payouts are funded by the line of credit. You cannot pay off the loan by borrowing from the line of credit. LESA should not be thought of as money sitting in an account because if it were, it would have been funded from the start, leading to a higher balance and more accrued interest. While I cannot comment on PHH's handling of tax and insurance payments, they are being truthful with you about the structure of LESA.
      Reply to Michael
Donna
November 4th, 2022

Hi Arlo,

I am ready to close on reverse mortgage and we will be in the lesa program. I am not current with my present mortgage. Will the reverse mortgage still close?
Reply to Donna
- Michael Branson
  November 4th, 2022
  
  Hello Donna,
  
  I suspect the fact that the current mortgage is not current is why the lender approved you with the LESA. The lender must determine that the circumstances that caused the delinquency will not recur now that you will have the reverse mortgage with the LESA account paying your taxes and insurance.
  After all, it would not be doing you any favors to close the reverse mortgage if you still could not afford to live in the property even after the loan closed. Therefore, HUD now uses financial assessment guidelines. HUD wants lenders to be sure that after this loan closes, you can live comfortably in the home based on your new situation.
  If not, if things are still a struggle even after the reverse mortgage closes, it would be better for you to sell now while your equity was at its highest than to allow it to become depleted then you are ultimately forced to sell anyway. So, if the loan with the LESA will allow you that financial independence, then the lender should have no issues closing the loan.
  Reply to Michael
Gregg M.
October 28th, 2022

Can I have an estimate of how many years life expectancy used for a lesa?
Reply to Gregg
- Michael Branson
  November 4th, 2022
  
  Hello Greg,
  
  The standard HUD uses for the LESA account is published in their Financial Assessment Guidelines on the HUD site at https://www.hud.gov/sites/documents/16-10ML-ATCH.PDF.
  For a 67-year-old borrower, HUD uses the life expectancy shown in the U.S. Decennial Life Tables for 1979 - 81 for females rounded to the nearest whole year. Keep in mind that they also use the age of the youngest borrower so if there are more than one borrower on the loan, they will use the age of the youngest borrower.
  
  To answer your question specifically, the HUD chart uses 17 years for a 67-year-old borrower. HUD uses the chart for females as they typically have a longer life expectancy. These timeframes extend beyond the life expectancy from 1979-1981 when the tables were established and these expectancies still extend beyond the most recent numbers I was able to find as published by the CDC on August 23, 2022 https://www.cdc.gov/nchs/data/nvsr/nvsr71/nvsr71-02.pdf.
  
  If you know that your family has many examples of longevity and that living beyond age 84 is a very strong possibility for members of your family, I will strongly suggest that for the next 17 years you put some money into an account to pay taxes and insurance when they become due, and the LESA account is then exhausted. For most people, this will never become an issue.
  Most individuals will either pass or leave the home before they need to worry about their LESA account or paying taxes themselves but if you believe this may become an issue for you, now is the time to take small steps to meet this future obligation.
  Reply to Michael
Lucy
September 1st, 2022

Hello Arlo,

I was requested to have reverse mortgage LESA due to late property taxes. I have not agreed to the set aside yet but wondered if I applied through a different reverse mortgage lender could they view this differently?
Reply to Lucy
- Michael Branson
  September 1st, 2022
  
  Hi Lucy,
  
  Under the HUD financial assessment guidelines, credit assessment is now a part of the basis for determining the availability of the program for borrowers. HUD is especially concerned about failure to pay property charges on time which includes mortgage payments, property taxes, hazard insurance, HOD dues, etc.
  One late payment that was not within the past 24 months for which you have a good explanation might be looked at differently by another lender. If your late property charges are in the last 24 months and/or are multiple times late, I am confident the LESA would be required by every lender to meet the HUD requirements.
  It still doesn't hurt to just check with another lender to be sure you are getting the best deal though and that your interest rate is not also eating up a lot of the money available to you.
  When rates rise as they have been doing, it doesn't take a lot to lower the proceeds to the borrower and if the lender with whom you are working is giving you a higher rate, you could be losing thousands in loan proceeds there.
  It would not hurt to just check our calculator if nothing else, just to assure yourself that you are getting the best proceeds before the LESA requirement.
  Reply to Michael
Jeanne L.
January 20th, 2022

Can unpaid property taxes be added to a reverse mortgage?
Reply to Jeanne
- Michael Branson
  January 20th, 2022
  
  Hello Jeanne,
  
  All mortgages and liens must be paid at closing but remember that if you do have any unpaid property taxes, or any late payments of any property charges (which includes mortgage payments, taxes, insurance, HOA dues, etc.) within the past 24 months, lender will probably require a Life Expectancy Set Aside under the HUD financial assessment requirements.
  Due to the fact that too many reverse mortgage borrowers were still defaulting on their other property charges even after they got a reverse mortgage, HUD now requires lenders to review these payments carefully. If borrowers have paid them late in the past 24 months (two years), lenders must establish a set aside account from the reverse mortgage proceeds to pay these charges.
  
  The amount that must be set aside can be quite substantial. It is based on the amount of the charges and the age of the youngest borrower on the loan. Because the charges need to be paid for the life of the loan, if your taxes and insurance are very low and you are in your late eighties, the set aside would be minimal.
  However, if your life in an area like Florida or Texas where property taxes can be quite high and you are just 62 years of age, the amount needed to be set aside from your loan could reach high 5 or low 6 figures in some instances. It all depends on your circumstances.
  Reply to Michael
Alfred P.
May 10th, 2021

How much would a "set aside" be on a reverse mortgage on $70,000 because of my credit score being low?
Reply to Alfred
- Michael Branson
  May 10th, 2021
  
  Hello Alfred,
  
  I cannot answer that in this forum. The set aside is not based on the size of the reverse mortgage but rather on the amount of the taxes and the length of the requirement of the set aside.
  For example, if you are 62 years of age, the set aside is required for a longer time since it is for your life expectancy than if you are 87. Also, if your annual taxes are $500, your set aside is much smaller than someone for whom the lender needs to set aside enough funds to pay an annual tax bill of $2,500. If there are two borrowers, the set aside would be based on the age of the younger borrower.
  
  Also, HUD does not use credit scores to determine eligibility or the need for set asides. A low score in and of itself does not require a borrower to get a set aside. If you have had credit issues in the past and have good reasons for the issues or can support that those issues were beyond your control (death in the family, illness, loss of job, etc.) and especially if you have been on time with all property related payments for the past 24 months or longer (mortgages, taxes, insurance any HOA dues), you may not even be required to get a Life Expectancy Set Aside (LESA) regardless of your credit scores.
  You really do need to speak with a lender and let them review your individual circumstances to know for sure.
  Reply to Michael
Michael Branson
January 20th, 2021

What is a LESA and is everyone required to put all future taxes aside? My credit is excellent
Reply to Michael
Richard S.
December 28th, 2020

Dear Arlo,
I applied for a reverse mortgage back in 2017, but the applicated was declined due to the inability to afford the required set-aside. As a result of the abovementioned, have living below the poverty level and struggling to make ends meet ever since. Also, since student loans do not require set-asides, wonder if I have a case for age discrimination? Please advise.
Reply to Richard
- Michael Branson
  December 28th, 2020
  
  Hi Richard,
  
  I cannot give you legal advice, but since the loan is limited to individuals age 62 and over in the first place, we often have individuals who are not yet 62 who are asking the same question in reverse.
  They want to know if the fact that they cannot get a reverse mortgage at, for instance, 40 years of age is discriminatory.
  I cannot render a legal opinion on that either, but it has remained valid since Ronald Reagan signed the law making the Home Equity Conversion Mortgage (the reverse mortgage) a federal, FHA-insured program in 1988 following the pilot program passed by Congress in 1987.
  
  I do not know if the set aside was suggested in your case due to credit issues, insufficient income or what, but HUD implemented the financial assessment rules in 2014 since too many borrowers were defaulting on taxes and insurance after they had closed a reverse mortgage.
  HUD does not want borrowers to get a reverse mortgage and then still not be able to meet their financial obligations (either because they have shown a willingness to pay those obligations in an untimely manner or because they do not have sufficient funds to make all their payments and still live comfortably even after the reverse mortgage).
  The thought process is that allowing a homeowner to use the equity in the home if their living circumstances are not sufficiently improved does not help that homeowner and hurts them, that they might be better off recognizing that they should sell the home instead of delaying the inevitable.
  HUD does not want borrowers to use equity in the home and then need to sell later anyway but then have less equity.
  
  As I started by saying, I cannot give you legal advice and if you want an opinion on discrimination, you will need to consult an attorney. Our advice to you would be to start with a HUD-approved counselor though.
  If you own a home and are living below the poverty level and cannot qualify for a reverse mortgage, a third-party counselor may be able to help or at least show you alternatives that might work in your case.
  If you need an attorney who might be able to provide free legal advice based on your financial situation, I suggest you do an internet search using "free legal aid near me". Best of luck to you, whichever road you choose.
  Reply to Michael
Edna
December 8th, 2020

How can they hold money from your loan that you are not allowed to access? What do they do with this money? How can they call that part of the loan?
Reply to Edna
- Michael Branson
  December 8th, 2020
  
  Hello Edna,
  
  When the lender does a set aside, that just means that a portion of the proceeds are set aside and not available to the borrower to be used for a specific purpose.
  The lender does not do anything with any money, they just don't fund that portion of the loan.
  For example, your available loan amount may be $100,000 but you have a set aside $20,000 for the payment of taxes.
  You received the $80,000 but the other $20,000 is not yet borrowed and you do not accrue interest on those funds or any portion of them until the lender uses them for paying your taxes and then you only accrue interest on the additional funds as they are used.
  That is when the lender would advance you more funds and your borrowed funds become greater. Now let us say you pay the loan off before you ever use all the funds - let's say you only use $10,000 of the $20,000 held back.
  There is no money sitting somewhere waiting for you in an account, you just owe that much less when you pay the loan off.
  The payoff would be for the $90,000 you borrowed plus any interest that accrued. It is like a credit card that has a limit of $10,000 and you paid it off when you had only spent $5,000.
  You only owed $5,000 because that is all your limit line that you used and the bank didn't have another $5,000 sitting somewhere for you, that was additional credit available to you but since you didn't use it, you are not required to repay it.
  Reply to Michael
Ayette L.
November 11th, 2020

My mortgage is past due for 7 months, but I have enough equity for LESA pay off arrearage through reverse mortgage. Will the late payments disqualify me from being approved?
Reply to Ayette
- Michael Branson
  November 11th, 2020
  
  Hello Ayette,
  
  Not necessarily.
  Income and credit are reviewed, and the underwriter will be looking for a good explanation of the delinquency but if the issue is not an on-going problem and will be resolved with the loan, your chances of approval are good.
  For example, if your credit was good prior to this time and your delinquency was caused by something beyond your control, such as the current Covid issue and loss of employment as a result, you would have a really good opportunity to still be approved.
  HUD will allow leeway for borrowers who have had bad luck with circumstances beyond their control who are otherwise financially responsible and the last 7 months have been the most financially difficult for many families and individuals most borrowers have had to deal with in their lives who were not alive during the great depression.
  If you are one of the many who have been hit by this pandemic, your income has been affected and your circumstances show that you had a good credit history prior to I would encourage you not to be afraid to apply.
  Reply to Michael
Tammy
October 7th, 2020

If money is set aside for taxes and insurance on a reverse mortgage and it was not all used is it reimbursed?
Reply to Tammy
- Michael Branson
  October 7th, 2020
  
  Hello Tammy,
  
  There is no reimbursement for funds you never borrowed but then again, since the money was never used, you or your heirs do not need to repay this portion of the loan either.
  The money in the set aside is not considered borrowed until it is sent to your insurance company or your tax assessor for payment.
  You do not accrue interest on these funds until they do use them to pay for the assessments and then only on the portion that is used for those purposes.
  So, if you decide to sell your home in a few years because your plans change and you only use $3,000 of your set aside funds, this is the only portion of the proceeds that would be included in your loan balance (plus any other funds you actually drew and any interest that accrued) to repay the loan, not the entire set aside amount.
  Since you didn't use the entire amount of the set-aside, you never borrowed those funds and they do not need to be repaid.
  
  Think of it like a credit card with a $20,000 credit line on which you only charged $2,000. If you pay the card off, there is not $18,000 to "refund" to you because you did not use those funds, you just are not required to repay money you never used.
  The same is true of unused funds in the set aside or in the line of credit on the reverse mortgage.
  If you do not use it all there is no credit for the rest of the line, you or your heirs just do not owe money you did not use and the equity in your home is that much higher.
  Reply to Michael
  - Tammy
    October 11th, 2020
    
    Thank you so much you have been such a great help I know I have swamped you with questions lately but I want you to no I really am thankful for all the help you have bestowed on me . Thank you again not gonna say I am through picking your brain yet lol
    Reply to Tammy
Miguel O.
May 4th, 2020

Everywhere I turn it seems that a LESA account prevents me from getting a reverse mortgage. Would a LESA growth factor improve my chances or are they most likely including said growth factor in their estimates? Pertinent factors: 65 years old, $250,000? appraised value, no mortgage $9,253.00 yearly charges for real estate taxes + homeowners' insurance.
Reply to Miguel
- Michael Branson
  May 4th, 2020
  
  Hello Miguel,
  
  HUD started requiring the LESA account under certain circumstances when they instituted their Financial Assessment guidelines.
  If you have been late on any mortgage payments, taxes, insurance or other property charges in the past 24 months, it is almost sure that a LESA will be required. If the issues are related to other credit items, it would depend on overall credit patterns along with your explanations for the delinquencies.
  
  If the need for the LESA is income related, the only way to keep from having to get the LESA would be to either increase your income or lower your debts. And yes, the amount of the set aside already takes the growth of the line into consideration in the calculation when the amount is determined.
  Reply to Michael
- Richard S.
  March 27th, 2021
  
  Understand how you feel. Was denied a hecm in 2017 due to the inability to afford to put up the lesa, which was required because of a federal tax lien. Been living below the federal poverty level and struggling for survival since.
  Reply to Richard
JOHN M.
November 27th, 2019

What if I will leave all the proceed as LESA, I am 62 my income is not enough to pay for the association monthly charge can my son or my brother guarantee it will be paid through them
Reply to JOHN
- Michael Branson
  November 27th, 2019
  
  Hello John,
  
  The HECM loan does not have a provision for a guarantor. If you cannot meet the HUD financial assessment requirements even with the LESA provisions, HUD feels that the loan may not be the right loan in your circumstances and perhaps you should be looking at other options such as relocation or downsizing rather than using your equity if you are still unable to comfortably remain in the property.
  If your son or brother are also living in the home and are old enough to also be on the loan, you can add them to title and include them on the loan as well though. In that case, the qualification would include all your information.
  Reply to Michael
Helen M.
October 15th, 2019

Does the set aside amount come off the payoff amount, when selling the home?
Reply to Helen
- Michael Branson
  October 15th, 2019
  
  Hello Helen,
  
  The amount set aside is just money that you are not able to borrow, and the lender uses to pay taxes and insurance as they become due. Any payments made on your behalf, become part of the balance owed as they are paid to the tax assessor or your insurance company to pay assessments as they are due.
  If there are funds remaining that were set aside that you have not yet used when you pay your loan off, those funds were never borrowed and therefore do not have to be repaid. Think of it like a credit card that has a balance of $10,000 but has a $20,000 limit.
  If you pay the card off, you only must pay the $10,000 balance not the entire limit because you didn't use the entire amount available to you.
  Reply to Michael
Sally
October 3rd, 2018

What happens to the LESA on as reverse mortgage when the borrower dies ?
Reply to Sally
- Michael Branson
  October 3rd, 2018
  
  Hi Sally,
  
  I hear this question frequently but nothing happens to it because a LESA is money that was never borrowed. The LESA (Life Expectancy Set Aside) are funds that are not made available to the borrower out of the loan proceeds until the borrower needs them to pay for expenses such as property taxes and insurance. Therefore, they are not borrowed funds until such time as they are used for their intended purpose and only then do they become borrowed funds. If a borrower were to pass and the funds were never used, then the borrower never borrowed that portion of their loan and therefore, they don't have to be repaid either.
  
  For example, if a borrower has a reverse mortgage of $200,000 but has a LESA of $50,000 to pay taxes and insurance for life, the borrower only has access to $150,000 of the loan proceeds. The servicer will use the remaining $50,000 in the line as needed to pay for the taxes and insurance only as they become due. If the servicer uses $5,000 of the funds to pay these expenses and the borrower chooses to sell the home, then only the amount the borrower borrowed of $150,000, plus the $5,000 used to pay taxes and the interest that accrued on those amounts is due and payable by the borrower or the borrower's heirs. The borrower doesn't get the entire $50,000 back when the home sells, but then again, the borrower doesn't have to repay the entire $50,000 either.
  
  The money was never borrowed and so it does not have to be repaid. This is also true for heirs of a reverse mortgage borrower when that borrower passes. The borrower never borrowed the full amount and so the heirs do not have to repay the full amount if they want to keep or sell the property. Another way to think of it is like having a credit card with a $10,000 credit line where you only spend $500.00 on that card. You may have a $10,000 line of credit, but if you only spent $500.00 on that line, that's all you have to repay. And if you pass and still had $9,500 available on the line that you didn't spend, your heirs don't get to keep the other $9,500 of credit line that you never borrowed.
  
  Many borrowers actually prefer a LESA. It doesn't cost them anything to have it. You don't accrue any interest on the money in the LESA account because as I stated, the money is not borrowed until it is actually sent to your tax assessor or your insurance agent so the funds are not borrowed until they are actually used to pay your expenses. Borrowers with LESA accounts never have to worry about budgeting for and paying the taxes and insurance again. For these reasons, some borrowers choose to voluntarily take a LESA account but we caution you to consider this action carefully. While it is not a bad idea and works well for some, once you voluntarily choose a LESA account, you cannot change your mind later.
  Reply to Michael
Rhonda-Lee Schroeder
May 16th, 2017

How do you justify taking 2/3 of the loan amount for lifetime payments of taxes plus ins. I can understand holding back an amount that is maybe 1/4 of the loan in good faith should the borrower neglect to pay taxes and ins. Yes out of 48,000. 30,000. goes into your slush fund for taxes and ins. The lenders try to make it sound like it's a good thing, then don't even give the borrower the opportunity to continue paying ins. and taxes like they have for 40 some years.
Reply to Rhonda-Lee
- Michael Branson
  May 16th, 2017
  
  Hi Rhonda-Lee,
  
  The LESA (Life Expectancy Set Aside) requirement is a HUD requirement established with their Financial Assessment Rules in 2014 and implemented in 2015, it is not a lender requirement. Also, HUD doesn't require it for all borrowers, just borrowers who do not meet the qualification guidelines or who have a history of NOT being able to pay their taxes and insurance or mortgage payments and other obligations on time, not for those who meet the parameters and have always paid their debts on time.
  
  HUD lost billions of dollars on the reverse mortgage program in 2012, much of that due to property values but also due to a spike in tax and insurance defaults. Borrowers just quit paying their taxes and insurance and when HUD did a detailed analysis of their portfolio, they identified certain risk factors that pointed to higher probability of default. Since default on taxes and insurance is a default on the loan and can lead to foreclosure, HUD looked for a solution that would allow borrowers to still obtain the loan while not endangering the program for all.
  
  Yes, it can take a big bite out of the proceeds, especially if your taxes and insurance are high, you are in the lower end of the age range and your proceeds are not great after paying off your existing loan in the first place. But let's look at the positive side. The funds are not borrowed until the lender actually advances them to make a payment and therefore it is not costly to the borrower and there is no fee for doing a LESA. Borrowers don't have to worry about coming up with the payment for their taxes and insurance once they have a LESA freeing up their ability to use money they may have had to save to pay those expenses later. Borrowers never have to worry about forgetting and possibly having a call incident on their reverse mortgage loan (and by the way, failure to pay taxes and insurance can result in a foreclosure on most any home loan).
  
  Is it always the most preferable situation for all borrowers? No, but it is better than HUD saying that they will no longer grant reverse mortgages to borrowers with credit blemishes or show delinquencies on their current mortgage, taxes or insurance! Life was much easier for lenders before the financial assessment guidelines were implemented as well and I don't think there is a lender originating reverse mortgages that who doesn't long for the "good old days" when the loans were so much easier to originate and close, but at the rate borrowers were defaulting and other issues were arising, there weren't going to be any good old days if the program was cancelled and no one was able to use it. Who knows, now that there is solid appreciation again and the financial assessment has been enacted, maybe future results will show fewer defaults and losses allowing HUD to loosen the requirements a bit but that's always a ways out.
  Reply to Michael
Armand Kapp
February 15th, 2017

I had to have an escrow account with my reverse mortgage. I am being charged interest equal to the interest on whatever funds I withdraw. I did not pay interest on my escrow account with my thirty year home purchase mortgage I paid-off fifteen years ago. Why interest when my preference would be to continue paying my property taxes & H/O insurance myself?
Reply to Armand
- Michael Branson
  February 15th, 2017
  
  Hi Armand,
  
  Here's a secret. You aren't charged any interest on any reverse mortgage proceeds until the funds are actually used to pay for the taxes and insurance and then, and only then, they become borrowed funds and accrue interest. Because the lender actually advances funds on your behalf to pay taxes and insurance, it's just like the lender is writing a check to you on your line of credit. The only difference is that they send the check into the tax authority or to the insurance company on your behalf and only that amount becomes "borrowed funds" and begins to accrue interest, not the entire line amount or the entire set aside.
  
  And Armand, here's the really great news, there is never a prepayment penalty on a reverse mortgage so if you don't want this amount to be added to your balance and accrue interest, you can always make a payment on your loan to the lender in the amount they just paid to your tax collector or insurance company to lower the balance on your loan at any time without penalty! It might not free up the funds for you to use for other purposes, but if you are concerned about accruing interest on funds used to pay the taxes or insurance, you can always pay down the balance on your loan to keep that from happening. If you don't want to do that because you need the money for other purposes, then it really didn't make any difference if they used the funds to pay the taxes and you had the money you needed for other purposes or if you used your own funds to pay the taxes and then used the reverse mortgage proceeds for other purposes.
  Money is fungible and therefore there is no difference what it was used for or from what source it originated as long as the same results are achieved. If reverse mortgage proceeds are needed at all it doesn't matter where you apply them (taxes and insurance or other needs). If you do not need the reverse mortgage proceeds for any purpose at the time and you don't want the balance to grow by the amount the lender just used to pay your taxes and or insurance (thereby accruing interest on that portion of your line), you can pay back any payments for taxes and insurance with no penalty at any time so it is the same as if you had paid your own taxes and insurance and you would avoid accruing interest on those funds.
  
  I hope this helps.
  Reply to Michael
Rob
February 7th, 2017

I quote: "This financial assessment process is conducive to making the Home Equity Conversion Mortgage (HECM) an even safer loan product"
If a potential borrower can swallow such an absurdity he need not be concerned about who this financial assessment ( FA ) is making the product safer for! The FHA wants 1.25% insurance and will only allow 60% loan to value and now wants additional insurance to secure the loan. What are sheep for if not to be sheared?
Reply to Rob
- Michael Branson
  February 8th, 2017
  
  Hi Rob. I answered your comment in a new blog post you can read here.
  Reply to Michael
Phyllis Burris
November 18th, 2016

Can borrowers who require LESA set asides, use contract & third party that they chose to make mortgage & property tax payments. WE would like to take the $30,000 set aside amount & invest in an annuity which WOULD directly pay our mortgage company & property tax payments. In Doing so , WE can get interest on the $30,000 LESA SET ASIDE .WHICH WOULD OFFSET INTEREST RATES WE ARE BEING CHARGED FOR THE REVERSE MORTGAGE.
Reply to Phyllis
- Michael Branson
  November 18th, 2016
  
  Hi Phyllis,
  The LESA actually has it's own growth rate. There's no way around the LESA payments they must always be maintained by the servicing department.
  Reply to Michael
Jean H.
July 12th, 2016

What is a partial set aside?
Reply to Jean
- Michael Branson
  July 12th, 2016
  
  Hi Jean,
  
  HUD'S new financial assessment guidelines require borrowers to qualify for their reverse mortgages now with income and credit qualification standards borrowers did not have to meet prior to April , 2015. In some instances, borrowers may not fully meet HUD'S stated requirements but they still give borrowers an opportunity to get a reverse mortgage loan with a set aside for taxes and insurance.
  
  A set aside is when the lender has to put funds aside from the reverse mortgage loan and make them unavailable to the borrower. That set aside can be a fully funded set aside or a partial set aside. HUD sets the rules for when and which set aside is to be used based on the circumstances that require the lender to set the funds aside. A partial set aside is when the lender sets funds aside to pay a portion of the borrowers taxes and insurance for the time the borrower lives in the home. If the loan required a fully funded set aside, sufficient funds would be set aside to pay the borrowers taxes and insurance presumably for as long as they live in the home.
  Reply to Michael
  - Janet
    September 20th, 2016
    
    My lender kept all of my money over $50,000 and gave me and my sister$12,000. My taxes are a little over 1800 per year. I am 66 and my sister 65, that means they are going to pay our taxes for the next 25 years, what if we don't live that long. We have nothing out of our reverse mortgage I think we have been taken advantage of.
    Reply to Janet
    - Michael Branson
      September 20th, 2016
      
      Hi Janet,
      If you were required to have the LESA (Life Expectancy Set Aside) under the new HUD Financial Assessment Guidelines as established in April of 2015, it is due to mortgage, tax, homeowner's insurance payment history or due to your incomes not meeting HUD's requirements. If the lender sets money aside to pay the taxes and insurance, there is no money that disappears if you do not live long enough to use it or decide to sell the home, it is simply money that you never borrowed and do not have to repay.
      For example, if you have a LESA of $50,000, this is an amount of the loan proceeds that HUD has required the lender to set aside to pay for future property expenses. The money only becomes borrowed funds as the lender uses them to pay for those expenses. If your taxes are $800 per year, then the funds set aside do not accrue interest but as soon as that first $800 payment is made by the lender on your behalf, then your loan balance would increase by that amount and then it would also accrue interest on this money. If the funds are never used, you never accrue interest on them and you or your heirs never owe this money.
      If your income was high enough to meet the HUD residual requirements and your payment history on your previous mortgage, taxes, and insurance were all without any lates (especially in the past 24 months), then you may want to ask your lender why the LESA was a requirement of your loan.
      Reply to Michael
  - Janet
    September 20th, 2016
    
    Jean,
    Be very careful with this set aside, we were forced to take one and they kept all of our money except for $12,000, what a rip off, I really think this is illegal and they are taking advantage of seniors.
    Reply to Janet
    - Michael Branson
      September 20th, 2016
      
      Hi Janet,
      
      I just answered your other question on the LESA and I would again ask why you were required to get the LESA?
      
      If the LESA was required as a result of your late payment mortgage payments or for your income being too low to meet
      the parameters established by HUD, that should have been known by the lender the minute you supplied your income information and they ran your credit.
      
      We also ask borrowers when we take a loan application if they have been late on taxes or insurance payments in the past 24 months and so that should have been known from the start as well.
      
      Finally, you are never "forced" to take anything.Â Once the lender informed you that your circumstances would require the LESA, you can choose to cancel
      the loan and the lender cannot charge you a cancelation fee.
      
      Some borrowers really like the LESA because then they don't have to make the tax and insurance payments anymore but for some, it can use up most of the proceeds the borrower's planned to use elsewhere and then the reverse mortgage may not be the right loan for you under those circumstances.Â
      
      We tell all of our customers that reverse mortgages are not for every borrower in every circumstance and if it is not right for you, then you should choose not to
      accept the terms and cancel before the loan closes.
      Reply to Michael
      - Ron B.
        November 10th, 2020
        
        What is the age that they use for the life expectancy set aside is someone who is 85 going to have 5-year set aside or 10 or 15
        Reply to Ron
      - Michael Branson
        November 11th, 2020
        
        According to HUD in Mortgagee Letter 2014-22, Attachment #2, 5.8 on Page 78, HUD uses the information below to determine the age to be used for the Life Expectancy of the Mortgagor's (borrower's) for set aside purposes.
        But then the formula for the set aside amount takes into consideration growth of the funds set aside as well as increasing costs.
        Lender's software calculates this amount automatically and, in all honesty, you would be hard-pressed to find a loan officer who does or even can calculate this amount manually.
        Your best bet is to check with a lender to see what the set aside amount would be for your circumstances.
        But now to answer your question specifically.
        You would be given a LESA of 6 years according to the tables referenced by HUD.
        Remember though, if the amount of the LESA you see is not exactly 6 years' worth of taxes and insurance, it is because the formula takes into consideration some room for increases to the expenses, interest rates and also some growth to the funds in the set aside account.
        
        5.8 Life Expectancy Table
        
        The figure used for life expectancy is taken from the U.S. Decennial Life
        Tables for 1979-1981 females found at Title 12, Appendix L. The life
        expectancy figures to be used are provided in Appendix 2 in the fourth
        column titled Loan Period 2 (life expectancy) (in years). Mortgagees must
        select the age of the youngest mortgagor (rounded to the nearest whole year)
        and use the corresponding life expectancy figure found in the fourth column
        of the table for the mortgagor's life expectancy.
        Reply to Michael
      - Robert R.
        October 25th, 2022
        
        If you have a reverse mortgage (HECM) in place with a LESA, and you outlive the LESA, what happens? Alternatively, say the LESA was calculated estimating that you would live to a certain age and pay the taxes and insurance, and you outlived the funds available in the LESA, what would happen in that case?
        Reply to Robert
      - Michael Branson
        November 2nd, 2022
        
        Hello Robert,
        These are great questions and ones to which all borrowers with LESA accounts should know the answers. Firstly, if you pass and there are still funds that were set aside in the account that you never used, those funds are simply not owed. For example, if you had a $300,000 reverse mortgage but $75,000 was set aside in a LESA to pay taxes and insurance, you only had access to $225,000 of your loan. The remaining $75,000 is used as needed to pay taxes and insurance as they are needed. The only part of the $75,000 that becomes owed is money that is used to pay these costs and it only accrues interest as it is used to pay your expenses.
        You do not owe interest on the funds set aside for payment until they are actually paid to the tax assessor or your insurance company and then only on that portion. The remaining funds continue to grow at the same line of credit growth rate the rest of your line of credit receives for money you have not yet taken from your line. This is one of the ways that the LESA account can set aside less money than would be required if the calculation just took your life expectancy and determined the dollar amount needed to pay your taxes and insurance for that time.
        In this example, if your lender only used $25,000 to pay taxes and insurance on your behalf from your LESA. There would not be $50,000 that would be paid to your heirs. You simply never borrowed that money, so it does not have to be repaid when the loan is settled. When your heirs repaid the loan, the balance would be repaid on whatever portion of the remaining $225,000 your borrowed, plus the $25,000 the lender used from your LESA to pay taxes and insurance and the interest that accrued (plus any costs initially to obtain the loan that you financed). Let's say you only drew $100,000 of your line of credit. The payoff would be $100,000 + $25,000 + accrued interest and any fees but not the remainder of the set aside.
        The second part of your question was what happens if you outlive your LESA? In that case, your taxes and insurance become your responsibility again. Remember, the LESA stands for Life Expectancy Set Aside. That means the lender only sets aside enough funds for your "Life Expectancy". The lender cannot set aside enough funds to be sure they are sufficient in all cases, or they would need to set aside sufficient funds to last until borrowers are over 100 years old as some borrowers do reach that milestone. This would all but exhaust too many borrowers' ability to receive any money at all from their reverse mortgage loans.
        The whole idea behind the LESA is to protect the borrower and HUD from the risk of default of non-payment of taxes and insurance. By allowing for the LESA, most borrowers are protected by covering them for their expected life and hopefully in those cases when the borrower does outlive the LESA account, the borrower will have time to prepare for that eventuality. Borrowers receive the disclosures at both application and closing, and they will receive monthly statements showing the status of the LESA account giving them ample opportunity to plan for the resuming payments in case they do exceed their life expectancy.
        Borrowers with a LESA account must be cognizant of the fact that the LESA account will only remain for their life expectancy and that they could outlive the account. We have always advised that the reverse mortgage should allow borrowers to remain in their home comfortably and with just a small amount of planning, such as putting cash aside in small amounts early on, can help budget for this eventuality later (especially if you know you are healthy and come from a family with good longevity).
        Reply to Michael

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