Have You Been Properly Introduced to LESA (to Help You Pay Your Property Taxes)?
In applying for a HECM reverse mortgage to help you retire better, one of the steps, established by the FHA in 2015, is a financial assessment to determine your ability to maintain your home and regularly pay your property taxes and homeowners insurance after your loan closes.
In short, the lender wants to make sure that you make enough money or have sufficient financial reserves to cover your living costs, supported by a solid history of fulfilling your previous loan and credit commitments.
If the financial assessment determines that you do not have enough income or assets to pay for your continuing housing expenses or if you have poor credit, you could still be eligible for a HECM reverse mortgage, but it will include a very important condition designed to protect you, your lender, and the U.S. government, which is insuring the reverse mortgage. This added protection is known as a LESA, which stands for Life Expectancy Set-Aside.
In one sense, a LESA functions very much like an escrow or impound account on a traditional mortgage, whereby the lender sets up an account on your behalf for the specific payment of property taxes and homeowners insurance that you fund each month as part of your regular mortgage payment.
With a reverse mortgage, however, there are no monthly mortgage payments (given you maintain the property, pay property taxes and homeowners insurance, and comply with loan terms) to which the impounded amount can be added. Therefore, the reverse mortgage lender, using a government actuarial chart, will multiply your expected life span (number of years) by your projected property taxes, homeowners insurance, flood insurance (if applicable), and other possible housing expenses (sum of yearly costs), to determine your set-aside. So, if your life expectancy is 15 years from the time you take out your reverse mortgage and your annual housing expenses are projected to be $5,000, your LESA would be $75,000 (15 years x $5,000 = $75,000).
The LESA calculation takes into account that your housing expenses will likely increase over time due to inflation. The formula is also based on the age of the youngest borrower. For example, coborrowers Bill, age 70, and his wife, Jill, age 65, would require a larger set-aside than if Bill were the sole borrower because Jill, the youngest borrower, would have a longer life expectancy.
LESA Advantages?
Because a LESA is a one-and-done, set-it-and-forget-it account, you have one less (big) bill to worry about. As long as there are funds in your LESA, you won’t find yourself thinking, “I would install that new walk-in bathtub or schedule that weekend getaway, if only I didn’t have those property taxes and homeowners insurance bills coming due again.”
The autopilot features of a LESA are also attractive to many reverse mortgage borrowers not required to establish a set-aside account as a condition of their loan. They just figure that if they’re seeking a reverse mortgage to reduce their bills or create more cash flow, why not use the convenience it provides to also avoid the constant worry (and possible penalties) over missing a payment?
LESA Disadvantages?
Although LESAs are established to ensure payment of property taxes and homeowners insurance, it’s possible that the amount set aside could run dry if you exceed your life expectancy. Say you live to be 92 when your LESA was based on a life expectancy of 87. After all, you could live as long or longer than Kirk Douglas, who lived to be 103. In such a scenario, you would take over the payment of your property charges and taxes. Your lender is required to notify you if your LESA account is nearing depletion, after which you would be responsible for making your property tax and homeowners insurance payments. In the event you fail to make your required payments, your lender, acting on HUD’s authority, can pull funds from the remaining equity in your reverse mortgage account.
If you require a LESA, it will reduce your overall reverse mortgage payout. But it also should lift a big financial concern off your shoulders for all or a majority of your retirement years. In addition to boosting your cash flow — because you will have one less bill to pay — it will provide you the peace of mind that one of your biggest retirement expenses is covered for years to come.
We hope this article has given you some help with things to think about. Of course, every situation is different. The information shared was verified at publication. This article is intended to be general and educational in nature and should not be construed as financial advice. Consult your financial advisor before implementing financial strategies for your retirement.
