Like all mortgage loans, it’s no secret that reverse mortgages also come with their share of costs and fees. And if you’re in the process of considering a reverse mortgage, the thought that’s likely crossed your mind is, “Can I really afford to do this?”
At Longbridge Financial, we’re committed to recommending a reverse mortgage only after we’re certain it’s the right move for you. As a borrower, you’ll also be required to attend a reverse mortgage counseling session to make sure that the loan is absolutely the right choice for your financial situation. Beyond the initial reverse mortgage education and required counseling session, applicants are now also required to undergo a financial assessment.
Established by the Federal Housing Administration (FHA) in 2015, the financial assessment is designed to determine your ability as a borrower to fulfill reverse mortgage loan obligations, such as maintaining your home and regularly paying your property taxes and insurance.
As part of the assessment, the lender will look for a solid history of you fulfilling previous loan and credit requirements, and make sure that you have enough income or sufficient financial reserves to cover your basic living expenses. However, if the assessment finds you have less than perfect credit or inadequate income or assets to pay for these expenses, you may still qualify for a reverse mortgage. In this case, you may be required to have loan insurance in the form of a Life Expectancy Set-Aside (LESA).
What is a LESA?
A Life Expectancy Set-Aside (LESA) is a pool of funds withheld from your total available reverse mortgage proceeds to pay for property and insurance charges throughout the estimated life of the loan. Designed to help reverse mortgage borrowers with limited income or bruised credit, LESA funds are set aside and are not subject to interest or mortgage insurance premiums until they’ve been paid toward your property insurance and taxes.
Similar to an escrow on a traditional mortgage where the lender sets up an account to handle the payment or property taxes and homeowners insurance on your behalf, it’s important to note that reverse mortgages do not come with mandatory monthly mortgage payments. As such, the reverse mortgage lender will work with you to calculate the one-time contribution of funds needed for your LESA.
Your set-aside will be calculated by multiplying your expected life span in years by your projected property taxes and homeowners insurance. The formula is based on the age of the youngest borrower on the loan and also accounts for inflation that will likely increase your housing expenses over time.
For example, if your life expectancy is 20 years from the time you take out your reverse mortgage and your annual housing expenses are projected for $6,000, your LESA would be $120,000.
What are the Advantages of a LESA?
In a word: budgeting! With a LESA already accounting for your property and insurance payments, you have a clearer picture of where you stand budget-wise. Since a LESA is something you can set and forget, it’s one less recurring bill (and a large one, at that) to calculate in your spending plan. In fact, the one-and-done nature of a LESA is also becoming increasingly attractive to borrowers who are not required to have one, since it provides peace of mind that their taxes and insurance will be taken care of. If you’re considering a reverse mortgage with the goal of reducing your bills, eliminating recurring property and insurance payments could be a welcomed option. In doing so, you could free up more cash to spend on the things that matter most to you: travelling, making improvements around your home, dining out with friends, spoiling the grandkids—the list goes on!
What are the Disadvantages of a LESA?
Perhaps the most obvious disadvantage of having a LESA is that the total reverse mortgage payout available to you is reduced. If you’re in need of the maximum available funds as soon as possible, a LESA may not be your best option. Furthermore, since LESAs are calculated based on a life expectancy, there is a chance that you could outlive your set-aside. While most reverse mortgage borrowers do not exhaust their set-asides in their lifetimes, such a scenario would require you to resume the payment of your property charges and taxes.
Research shows that 94% of reverse mortgage borrowers have enjoyed peace of mind as a result of the loan*. Designed to help improve retirement income and monthly cash flow, reverse mortgages can be a powerful tool for today’s senior homeowners. And even if you have less than stellar credit or a limited income, you may still be eligible for the loan—thanks to the LESA.
*Source: 2010 NRMLA study.