All reverse mortgage borrowers must meet certain financial obligations as part of their mortgage contract. Lenders conduct a financial assessment to determine if a borrower can meet these financial obligations. If the financial assessment shows the borrower doesn’t have adequate cash flow, a life expectancy set aside, LESA for short, is a possible avenue to a reverse mortgage.
LESA is an account created by the reverse mortgage lender and funded by the borrower with loan proceeds to cover property taxes and homeowner’s insurance. These accounts safeguard borrowers and lenders in case the borrower falls behind on reverse mortgage requirements like paying property taxes and homeowners insurance. Although falling behind in HOA dues, these dues are not included in the LESA.
The LESA will reduce the reverse mortgage proceeds available to the borrower because those funds are set aside to pay property obligations. The borrower will not be able to touch these funds since they are dedicated to ongoing taxes and insurance.
How Does a LESA Work?
A LESA works similarly to an escrow account in a traditional mortgage. The lender will use a governmental actuarial chart to determine how much to set aside. Specifically, the chart helps the lender determine the expected lifespan of the borrower. The lender will consider projected monthly property charges, the annual expected interest rate, and the age of the youngest borrower.
How Do Lenders Determine if a LESA Is Required?
As a part of the reverse mortgage application process, the lender needs to have a clear overview of a borrower’s finances to determine if a LESA is required. The lender will review an applicant’s financial history, which includes credit, debts, income, and employment records. All sources of income will be reviewed, including Social Security payments, pensions, retirement accounts, and investments. The borrower may also be asked to show tax returns and bank account statements.
The purpose of the assessment is to determine if the borrower can pay the homeowner’s insurance and tax payments., other property charges, and home association fees. If negative credit history raises questions as to why you haven’t paid certain bills on time, you have a chance to explain.
If the lender determines you can’t keep up with these requirements, establishing a LESA may help you qualify.
Who Can Set Up a LESA Account?
Even borrowers who aren’t required to set up a LESA can still create this account. Some may choose this option as a budgeting tool to avoid scrambling for funds to cover a large property tax bill at the last minute.
Also, a partial LESA can be set up for adjustable-rate mortgages. A lender may determine an applicant does not need a fully funded LESA and will establish what is known as a partially funded LESA if the borrower can manage a portion of what would have been required under a fully funded version.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.