Hi Fernando,

Great question.  Let me walk through how this works.

Why a LESA is required

A Life Expectancy Set-Aside (LESA) is not automatic.  It comes from the financial assessment every HECM borrower undergoes.  If the underwriter finds unsatisfactory credit history or a pattern of late property charge payments - taxes, insurance, HOA dues, ground rent - a LESA will be required.  The idea is that if a borrower has struggled to keep up with those obligations in the past, the lender sets aside funds up front to ensure they are paid in the future.

There are two types.  A fully funded LESA is required when the credit or property charge history is unsatisfactory, and there are no documented extenuating circumstances.  A partially funded LESA applies when the borrower fails the residual income test but has an otherwise acceptable credit and property charge history.

How the amount is calculated

The LESA is calculated to cover property charges for the life of the borrower.  The key factors are the borrower's age, the expected interest rate, the annual MIP rate, and the annual property charges.

One specific HUD requirement worth knowing - the property charge estimate used in the calculation must be 120% of the current annual charges, not the actual amount.   HUD builds in that buffer to account for increases in taxes and insurance over time.

The younger the borrower and the higher the property charges, the larger the LESA.  A 62-year-old with significant annual taxes and insurance will have a much larger set-aside than a 78-year-old with modest charges, simply because the funds need to cover a longer projected period.

Because interest rates directly affect how the Principal Limit grows over time, they also affect the LESA calculation.  Your lender runs this through HUD's HECM calculator software to get the precise figure for your situation.

How the funds work

The LESA is drawn from your Principal Limit at closing.  The funds sit in a dedicated set-aside and are drawn down as property charges come due.  Interest only accrues on amounts actually disbursed - the remaining balance continues to grow at the same rate as the rest of your line of credit.  If you pass away or move before the funds are fully used, neither you nor your heirs owe anything for the unused portion.

The practical benefit is that your taxes and insurance get paid automatically and on time for as long as you are in the home.  For borrowers who have struggled with those payments in the past, that is actually a meaningful relief.

Reference: HUD Handbook 4000.1, Section II.B.5 - Financial Assessment, LESA Determination (PDF pages 616-656).