How a “LESA” is Giving New Peace of Mind to Reverse Mortgage Borrowers
Reverse mortgages have changed for the better.
These mortgages, which allow people 62 and older to tap into their home equity in the form of a non-recourse loan, have new requirements and options making them safer and more sound for borrowers.
In 2015, the Federal Housing Administration, which ensures Home Equity Conversion Mortgages (HECM, or the most common type of reverse mortgage) implemented new financial assessment requirements for all borrowers.
In addition to required counseling, all loan applicants must go through a financial assessment to help ensure they can meet their loan obligations.
HECM loans come with several requirements, not unlike traditional “forward” mortgages.
All borrowers must maintain the following:
- Homeowners insurance policy
- Property tax payments
- Home maintenance to FHA standards
Historically, some borrowers have taken out their home equity as a lump sum payment, have spent the sum, and have been unable to adhere to those requirements. This has led to their defaulting on their loans.
The new rules were put in place to make sure borrowers can still meet those requirements.
If there is a question about whether they will be able to do so, they may be required to have a Life Expectancy Set Aside, or a “LESA.”
Like the concept of an escrow account or a set aside to pay forward mortgage taxes and insurance, this LESA is calculated based on the borrower’s age and life expectancy and helps plan for these ongoing payments.
It allows them to plan for future payments in advance, removing the possibility that they will exhaust their proceeds and end up unable to meet their obligations.
While some borrowers are required to have a LESA based on the financial assessment, others can simply choose to include one in their reverse mortgage plans.
This can give peace of mind to new borrowers who may have reverse mortgage concerns.
Why a LESA Set-Aside can be a good thing
A LESA set-aside will mean the borrower receives less in proceeds, but it’s also a great option for a borrower who has any hesitation about meeting the loan requirements.
In fact, some family members of reverse mortgage borrowers are requesting a Tax and Insurance set-aside to give their aging parents peace of mind.
Consider the following scenario:
- Betty was born in 1932, has a home valued at $750,000 and has no existing forward mortgage on her home.
- Her taxes and insurance amount to $218.71 monthly
- She has decided to take $50,000 upfront from her reverse mortgage loan proceeds to complete some home modifications
Betty wants to remain independent but is worried about making her tax and insurance payments over the course of her loan.
Her son recommended that she request a LESA to ease her worries.
With a LESA of $18,847 Betty can still access the home equity she needs and does not need to worry about ever missing a tax or insurance payment.
By setting aside a small portion of her home equity in advance, she can achieve her financial goals without any additional worry.
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 are used by the servicer 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 do not have to be repaid.
How does a LESA benefit me?
If a reverse you have 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 and 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 that 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 take a set aside account to pay taxes and insurance even though most are the result of 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.
If the borrower has a line of credit loan, they can then use any leftover set aside funds for whatever purpose they desire but if you have a fixed rate loan, any set aside funds are credited back against the loan balance and the borrower cannot take those funds as an additional draw.
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