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How is the reverse mortgage life expectancy set-aside calculated?

By Fernando A. on 12.14.2018

Hello Fernando,

The amount is set by HUD calculations.  If you are required to have a Life Expectancy Set Aside due to income qualification issues or due to past credit issues (especially with non-payment or late payment of taxes, insurance and other property charges), HUD will determine the amount needed to pay those assessments for the anticipated life of the borrower(s) taking into consideration the growth of the funds in the line of credit. 

In other words, the amount will depend on the ages of the borrowers and the amount of the charges.  If the borrowers are in their late 70’s, the taxes are $500 per year and the property insurance is also about $500.00 per year, the LESA would be very 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 greater to be able to pay that 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 who required 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 per year of 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 a much longer period, the LESA is much greater for the second borrower.

The good things about the LESA are that you are not accruing any interest on funds set aside until the lender uses them to pay your property taxes or your insurance.  Therefore, it’s kind of like having a credit card you haven’t used yet.  The funds are there for when the lender needs them, but it’s not costing you anything while they don’t have to draw on them to pay your charges.  Also, you don’t ever 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 were going to find the money to pay your taxes, etc.  They are paid for you from your line of credit and always paid 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 and it is not included in the amount any of you need to repay when you refinance the loan or sell the home.

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