What Is a LESA for a Reverse Mortgage?

One of the reasons why reverse mortgages are an attractive option for qualified older homeowners is that the ongoing financial requirements essentially are limited to maintaining the home in good condition and paying homeowners insurance and property tax bills.

If borrowers are unable or unwilling to meet those requirements, they still may be able to get a home equity conversion mortgage — the most common type of reverse mortgage — by adding a life expectancy set-aside, or LESA, to it.

A LESA relieves the borrower of the responsibility to pay those bills. The trade-off is that they will receive less of the equity they borrow as cash. Knowing how a LESA works and the implications of using one are important steps in deciding to get a reverse mortgage.

What Is a LESA?

LESA stands for life expectancy set-aside. When a homeowner takes out a reverse mortgage, a LESA is a dedicated savings account that holds funds for property taxes and insurance over the homeowner’s expected lifetime.

With a LESA, the lender deposits part of the proceeds from a reverse mortgage to pay required property expenses, such as:

• Homeowners insurance.
• Property taxes.
• Flood insurance (if applicable).

Related: Tax Benefits of Owning a Home

Depending on the reverse mortgage borrower’s financial situation, a LESA may be required by the lender. Even when not required, a LESA may be helpful to ensure that funds are set aside so the borrower doesn’t have to scramble to come up with funds by the annual due date.

When required, the minimum amount for a LESA is calculated based on current property costs, along with an estimate of how long the owner is expected to live in the home. A LESA is funded with a one-time payment at the start of the reverse mortgage.

Here’s an example of how a reverse mortgage LESA works. Assume a borrower owns a home worth $500,000, takes out a reverse mortgage for 50% of their home’s equity ⁠— which is $250,000 ⁠— and chooses a LESA to pay their property charges. If the LESA reverse mortgage formula determines they need $50,000 to pay their property charges over the estimated life of the loan, that sum would be set aside from the total loan amount. The amount the borrower will receive as cash would be $200,000, and the remaining $50,000 would be held in the LESA account.

How is a LESA calculated?

Lenders use a formula required by the Department of Housing and Urban Development to calculate the reverse mortgage LESA amount.

The LESA formula looks like this:

LESA = (PC ÷ 12) × {(1 + C)^{M + 1} − (1 + C)} ÷ {C × (1 + C)^M}

In this equation, PC is the annual property charge for taxes and insurance; M is the borrower’s life expectancy in months, based on government data; and C is the monthly compounding rate of the loan, which is the loan’s interest rate plus the monthly mortgage insurance premium. The age of the youngest borrower on the mortgage is used for this calculation.

For example, if a reverse mortgage borrower typically pays $10,000 for taxes and insurance each year, their life expectancy is estimated at 15 years, and the compounding rate of their loan is 0.5%, the LESA formula would look like this:

LESA = (10,000 ÷ 12) × {(1 + 0.005)^{180 + 1} − (1 + 0.005)} ÷ {0.005 × (1 + 0.005)¹⁸⁰}

That works out to $99,225.35, which is the minimum amount required for a LESA that would be deducted from the principal on an HECM in this case.

Different types of LESAs

When establishing a LESA, borrowers may come across two different types. Fully funded LESAs and partially funded LESAs are similar but require a different amount of savings.

Fully funded LESA

If the reverse mortgage borrower doesn’t meet the minimum credit history and property payment requirements, a fully funded LESA may be required. When fully funded, the LESA amount is calculated to cover all the property taxes, homeowners insurance, and other required payments for the borrower’s remaining life expectancy.

Partially funded LESA

When a reverse mortgage applicant meets minimum credit and payment history requirements but doesn’t demonstrate an acceptable monthly income, a partially funded LESA is needed. A reverse mortgage set-aside in this scenario only covers a portion of required taxes and insurance, and the borrower is expected to pay the remainder from other sources.

Even when a fully funded or partially funded LESA isn’t required, a borrower may choose to use a LESA anyway so they don’t have to worry about future required homeowner expenses.

Who Is Eligible for a LESA?

As part of the underwriting process for an HECM, the lender reviews the borrower’s finances and credit score. A reverse mortgage is a loan, so having good credit is important.

To qualify for an HECM, homeowners must:

• Be at least 62 years old.
• Live in the home as their primary residence.
• Own significant equity in their home, usually at least 50%.
• Be current on property taxes and have no tax liens or wage garnishments within the past two years.
• Have homeowners insurance in place for at least 90 days before applying.
• Have satisfactory credit.
• Meet with a government counselor.

It’s possible to meet those requirements with a credit history that lenders view as risky. In that case, the lender may require the borrower to have a LESA.

Pros and Cons of a LESA

LESAs have several benefits and drawbacks to consider. While they’re generally helpful to the borrower, they’re not perfect in all situations.

Pros of a LESA

Here’s a look at the primary benefits of having a LESA for your reverse mortgage:

• Easier to get a reverse mortgage. Without a LESA, a borrower with poor or no credit would be a higher risk for lenders and less likely to qualify for a reverse mortgage.
• Reduces the risk of default. One way to default on a reverse mortgage is to fail to pay property taxes or homeowners insurance. A LESA assures that these bills will be paid on time and in full, and reduces the borrower’s risk of losing their home.
• Helps inform your budget. A LESA takes the guesswork out of budgeting for property taxes and insurance. Knowing these annual expenses already have funds set aside can help the borrower plan for other costs.

Cons of a LESA

There are some downsides to having a LESA as part of your reverse mortgage:

• LESA funds come out of your loan amount. The LESA cash balance is taken from your total loan amount, meaning there’s less available for other purposes. If you need the full reverse mortgage proceeds and are required to use a LESA, you may be better off exploring other options.
• You can run out of funds. If you live in the home longer than expected, there’s a chance that the funds in your LESA will run out. “If you do exceed your expected life span, you would now have to make the payments for these yourself,” says Robert Scott, founder of Sell Land, a St. Louis-based real estate company. You’ll have to come up with additional funds, which may tax your budget.
• LESA minimums are nonnegotiable. Since they are calculated with a government-required formula, the borrower has no say in the minimum amount put into a LESA.

LESA Reverse Mortgage FAQ

LESAs are complicated, so it’s important to make sure you understand how they work. Here are the answers to frequently asked questions.

The Bottom Line on LESA Benefits for Reverse Mortgage Borrowers

A life expectancy set-aside, or LESA, can give homeowners and lenders peace of mind that property charges like taxes and insurance will be paid with a reverse mortgage. A LESA also saves you the trouble of remembering to make the payments. Even if your lender doesn’t require a LESA, you could consider adding one if you decide that a reverse mortgage is right for you.

Eric Rosenberg contributed to the reporting of this article.