What is a Life Expectancy Set-Aside (LESA)?
Key Takeaways
- A LESA functions like an escrow account to pay your property taxes and insurance.
- It is required if you fail the lender's financial assessment.
- A LESA drastically reduces the upfront cash you can borrow.
During the application process for a reverse mortgage, you may hear the loan officer mention a LESA, which stands for Life Expectancy Set-Aside.
For some borrowers, a LESA provides ultimate peace of mind. For others, it is a frustrating requirement that ruins their financial plans. Here is exactly what a LESA is and how it works.
Why the LESA Was Created
A decade ago, the reverse mortgage industry faced a crisis: thousands of seniors were being foreclosed on. They weren't missing mortgage payments (since there are none), but they were failing to pay their county property taxes and homeowners insurance.
To stop this, the FHA mandated that all lenders perform a "Financial Assessment" on applicants. The lender must review your credit history and calculate your residual monthly income.
If the lender determines that you do not have enough monthly income to comfortably pay your taxes and insurance, they will not deny the loan outright. Instead, they will require a Fully Funded LESA.
How a LESA Works
If a LESA is required, the lender takes a portion of your approved reverse mortgage funds and locks them in a dedicated account at closing.
The amount is calculated based on your current property tax bill, your insurance premium, and your statistical life expectancy. For a 65-year-old with high property taxes, a LESA could easily require $60,000 or more.
The Mechanics: 1. The $60,000 is held by the lender. 2. You do not accrue interest on the LESA funds until they are actually spent. 3. Every time your tax bill or insurance premium is due, the lender pays it directly out of the LESA account on your behalf.
The Pros and Cons
The Benefit: Ultimate peace of mind. You never have to worry about writing a check for property taxes or insurance for the rest of your projected life. The lender handles it entirely.
The Downside: Massive reduction in available cash. If you were approved for $100,000, and the lender requires a $60,000 LESA, you only have $40,000 left to pay off credit cards, fix your home, or cover medical bills. Many seniors walk away from the loan entirely if a LESA is required because they can no longer get enough cash to meet their needs.
Can You Request a Voluntary LESA?
Yes. Even if you pass the financial assessment with flying colors, you can ask the lender to set up a voluntary LESA. Many seniors who struggle with budgeting or worry about cognitive decline in the future choose a voluntary LESA to ensure their housing expenses are automatically covered no matter what happens.