What's LESA for reverse mortgages?

Reverse mortgages have long been an attractive option for retirees and older homeowners who want to leverage the equity in their property to help pad their retirement income and boost their quality of life. LESA, or Life Expectancy Set-Aside, is one of the options open to older homeowners to help achieve those goals.

A LESA for reverse mortgages is a fund withheld from the available reverse mortgage proceeds to pay for homeowner insurance and property taxes during the life of the loan. It safeguards the lender and the borrower if the latter falls behind on financial obligations like paying property taxes and homeowner insurance.

What is a LESA (Life Expectancy Set-Aside)?

A LESA is a fund created by a reverse mortgage lender from the available reverse mortgage proceeds to cover ongoing costs. It reduces the loan proceeds available to the borrower since they will be set aside to pay ongoing reverse mortgage costs. The LESA covers homeowners insurance, property taxes, some aspects of maintenance, and even flood insurance or other specific insurance you need.

Reverse mortgages are available to homeowners above age 62. Unlike a traditional mortgage, you won’t be required to make monthly mortgage payments, and you will retain the ownership of the property. The loan falls due once you sell the home or pass away. Your only obligations are maintaining the home and paying property taxes and homeowner insurance. When you take out your reverse mortgage, the LESA holds the funds required to pay property taxes and insurance over your expected remaining lifetime.

How Do LESA Accounts Work?

Think of the LESA as an escrow account on more traditional mortgage products. The lender issuing the mortgage retains part of the reverse mortgage proceeds to fund expected property costs for the remainder of your lifetime. The lender considers your current property taxes and insurance and holds that amount for each year you are expected to remain at the property.

Different Types of LESAs

LESAs may be required by your lender to qualify for a reverse mortgage. While LESA is not mandatory, it can give you peace of mind by knowing that future property costs will be catered for without having to dig into your pockets.

The main types of LESAs include fully-funded LESAs and partially-funded LESAs.

Fully funded LESAs

Fully funded LESAs calculate and cover all potential future costs, including property taxes, homeowner insurance, and any other payments that may arise for the borrower's remaining life expectancy. This type of LESA may be required if the borrower does not meet the financial obligations and credit history requirements.

Partially funded LESAs

Partially funded LESAs cover a portion of the required expenses, and you will be expected to pay the remainder from other income sources. It may be required when the borrower meets the financial obligation and credit requirements but does not have sufficient income to meet future homeowner expenses.

When is LESA required?

As part of the reverse mortgage application process, the lender will review the borrower's financial history to determine if LESA is required. Generally, the lender will consider the borrower’s credit history, debts, monthly income, and any past defaults. If you have retirement incomes such as Social Security benefits, pensions, and retirement plan distributions, the lender will consider these incomes to decide if you will be able to meet the ongoing homeowner expenses like property taxes and homeowner insurance.

If you meet the minimum credit and property payment requirements, and you have sufficient monthly income to pay the homeowner expenses, you may not be required to have a LESA with your reverse mortgage. However, if you don't meet the minimum credit requirements, you have accounts in collections, and your income is not enough to meet the future homeowner expenses, you may be required to have a LESA to qualify for the reverse mortgage.

Pros of LESA

Budgeting assistance

The LESA is a one-and-done expense, and that is its primary appeal. You have fewer major bills to face. As long as the account has funds, you won’t need to worry about property taxes and insurance. You can plan your remaining cash flow over the years, and you won't have to worry about meeting future homeowner expenses.

Reduces the risk of default

While you won’t be required to make mortgage payments, you must meet the ongoing homeowner expenses like property taxes. If you fail to pay these expenses, you will be considered to have defaulted on your reverse mortgage financial obligations. A LESA ensures that these expenses are paid on time, hence reducing the risk of default.

Eligibility flexibility

If you have poor credit or limited income, you won’t be eligible for a reverse mortgage loan. However, by setting aside funds in LESA to pay ongoing homeowner expenses, you can qualify for a reverse mortgage.

Cons of LESA

Reduced loan proceeds

The funds set aside in LESA are taken out of the available loan proceeds, hence reducing the amount of money available to the borrower either in monthly payments or lump sum payments. Hence, you will receive reduced payouts compared to a traditional reverse mortgage.

Risk of running out of funds

The fact that LESA is tied to an actuarial calculation of life expectancy means you could outlive the fund. When the fund dries up, the responsibility to meet your property expenses returns to you. If there’s still equity in your reverse mortgage, the lender will take that to cover the shortfall, which could impact your financial position at the time. If there’s no equity remaining, you risk defaulting on the mortgage.

Limited flexibility

The funds set aside in LESA can only be used to cover future homeowner expenses such as property taxes, homeowner insurance, and property maintenance costs. The funds cannot be used for other expenses such as healthcare costs.