Reverse mortgages have changed for the better. They have new requirements and options, making them safer and more sound for borrowers. Reverse mortgages allow people 62 and older to tap into their home equity as a non-recourse loan.
In 2015, the Federal Housing Administration, which ensures Home Equity Conversion Mortgages (HECM, or the most common reverse mortgage), implemented new financial assessment requirements for all borrowers.
In addition to required counseling, all loan applicants must undergo a financial assessment to help ensure they can meet their loan obligations. Home Equity Conversion Mortgage 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 implemented to ensure borrowers can still meet those requirements. If there is a question about whether they can do so, they may be required to have a Life Expectancy Set Aside or a “LESA.”
How a “LESA” Set-Aside is giving peace of mind to reverse mortgage borrowers
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 be unable to meet their obligations.
While some borrowers must have a LESA based on the financial assessment, others can 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 an excellent option for a borrower who hesitates about meeting the loan requirements.
Some family members of reverse mortgage borrowers request 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 throughout 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 without worrying 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 additional worry.
LESA FAQs
What is a reverse mortgage LESA set aside?
How does a LESA benefit me?
How does the LESA growth rate work?
Can I opt-in voluntarily for a LESA set aside?
What is a reverse mortgage repair set aside?
ARLO recommends these helpful resources:
November 4th, 2022
November 4th, 2022
October 28th, 2022
November 4th, 2022
September 1st, 2022
September 1st, 2022
January 20th, 2022
January 20th, 2022
May 10th, 2021
May 10th, 2021
January 20th, 2021
December 28th, 2020
December 28th, 2020
December 8th, 2020
December 8th, 2020
November 11th, 2020
November 11th, 2020
October 7th, 2020
October 7th, 2020
October 11th, 2020
May 4th, 2020
May 4th, 2020
March 27th, 2021
November 27th, 2019
November 27th, 2019
October 15th, 2019
October 15th, 2019
October 3rd, 2018
October 3rd, 2018
May 16th, 2017
May 16th, 2017
February 15th, 2017
February 15th, 2017
February 7th, 2017
February 8th, 2017
November 18th, 2016
November 18th, 2016
July 12th, 2016
July 12th, 2016
September 20th, 2016
September 20th, 2016
September 20th, 2016
September 20th, 2016
November 10th, 2020
November 11th, 2020
October 25th, 2022
November 2nd, 2022