How is the reverse mortgage life expectancy set-aside calculated?By Fernando A. on 12.14.2018
HUD calculations set the amount. Suppose you must have a Life Expectancy Set Aside due to income qualification issues or past credit issues (especially with non-payment or late payment of taxes, insurance, and other property charges). In that case, HUD will determine the amount needed to pay those assessments for the anticipated life of the borrower(s), considering the funds' growth in the line of credit.
In other words, the amount will depend on the borrowers' ages and the charges' amount. If the borrowers are in their late 70’s, the taxes are $500 per year, and the property insurance is about $500.00 per year, the LESA would be minimal.
On the other hand, if the borrowers were 62 and their annual taxes were $4,000, and the insurance was $1,200 per year, the LESA would have to be much more significant to pay for the lives of the younger borrowers.
Let’s use some actual figures.
If we have a 78-year-old borrower with $500 per year taxes and $500 per year insurance, which requires a LESA, the total set aside amount would be about $9,606 (subject to change based on interest rates and line of credit growth rate).
Our 62-year-old borrower with a much more expensive home and much higher taxes and insurance of $4,000 per year of taxes and $1,200 for hazard insurance would have a fully funded LESA of $83,661 at the same interest rate. Because the charges are so much higher, and the formula assumes the payment for much longer, the LESA is much more significant for the second borrower.
The good thing about the LESA is that you are not accruing any interest on funds set aside until the lender uses them to pay your property taxes or insurance. Therefore, it’s like having a credit card you haven’t used yet. The funds are there when the lender needs them, but it’s not costing you anything, and they don’t have to draw on them to pay your charges. Also, you never have to worry about paying these charges again.
The servicer pays them for you, and you aren’t worried every year, twice a year, or however often the charges were due about where you would find the money to pay your taxes, etc. You pay for them from your line of credit, always delivered on time.
Finally, if you move or pass before the LESA funds or any portion of them were used to pay the charges, this money was never borrowed, so you or your heirs don’t owe it. You didn’t accrue any interest on these funds, which is not included in the amount you need to repay when you refinance the loan or sell the home.