What is a LESA & How Can it Benefit Reverse Mortgage Clients?

The Federal Housing Administration (FHA) regulates and oversees the Home Equity Conversion Mortgage (HECM) program — often simply called reverse mortgages. To protect borrowers who use reverse mortgages as a form of retirement funding, the FHA has put in place a number of different safeguards that can help keep reverse mortgages affordable and effective. 

One safeguard that is available to retirees using the HECM program is a LESA, or Life Expectancy Set Aside. Life Expectancy Set Asides help homeowners ensure that they can pay their financial obligations — like property taxes and insurance — after they’ve signed up for a HECM reverse mortgage. Read on to better understand the LESA meaning and how it’s used. 

What is a LESA (Life Expectancy Set Aside)?

LESA reverse mortgages are made to ensure that borrowers who purchase a HECM loan are able to remain current on their other financial obligations. During the reverse mortgage application process, borrowers must undergo a financial assessment. They are required to provide financial information to help lenders determine whether they will be able to cover regular costs that are still associated with owning a home, even after receiving HECM funding. 

For example, these costs may include:

• Property taxes
• Home insurance
• Maintenance to uphold FHA standards
• Utility costs
• Homeowners’ association (HOA) fees
• And more

If, during the financial assessment, lenders determine that borrowers might struggle to keep current on these financial obligations, a portion of their reverse mortgage proceeds are set aside to ensure that the borrower is able to pay for these expenses. 

They are referred to as life expectancy set-asides because they are calculated in an effort to estimate the duration of the time the borrower is likely to need them, using the borrower’s life expectancy. This helps to secure funding that will cover property expenses for the borrower’s life, so that they do not run out. However, it is not guaranteed to do so. 

Who Needs a LESA?

Some borrowers’ financial situations make it difficult for them to stay current on the various financial obligations associated with owning a home. If the financial assessment portion of your HECM application process determines that you may have a difficult time covering these costs, you will be required to use a LESA reverse mortgage. 

If it is clear that, due to other sources of income or a high amount of owned home equity, you will not struggle to make these payments, then a LESA may not be required. 

How is the LESA Set Aside Amount Calculated?

To calculate the value of the LESA, lenders use the following formula:

LESA = (PC ÷12) × {(1 +c) m+1 ‒ (1 +c)} ÷ {c × (1 +c ) m }

• PC: property charges 
• m: life expectancy of the youngest borrower
• c: annual compounding interest rate

The LESA will be calculated during your application process. If you have questions, feel free to ask your Reverse Mortgage Specialist more about how the LESA is determined.

What are Some of the Benefits of a LESA?

For borrowers who might struggle to cover their financial obligations, a LESA can provide peace of mind that property charges are already covered by the terms of their HECM. LESAs also help to protect borrowers from falling behind on payments due to other reverse mortgage costs.