LESA reverse mortgage important information and resources you need to know before opting into a LESA reverse mortgage.
Qualifying for a reverse mortgage now is not the same as it was previously.
Because underwriting standards have tightened significantly in recent years, qualifying for a reverse mortgage today necessitates a more thorough examination of the loan applicant’s financial situation.
As a prospective borrower, it’s important to understand what you’ll be up against during the application process, including which areas of your financial history are most likely to influence whether you’ll be approved for a reverse mortgage.
Have no worry, candidates with a patchy financial history may still be able to receive a reverse mortgage through the use of a “LESA.”
What Exactly is LESA?
Life Expectancy Set-Aside is an acronym for Life Expectancy Set-Aside.
It was designed by the Department of Housing and Urban Development and went into effect in April 2015 as part of the new financial assessment underwriting criteria, with the goal of increasing the protections offered to reverse mortgage borrowers.
The LESA is a crucial part of the reverse mortgage application process. They influence not just whether an application is authorized for a reverse mortgage, but also the amount of loan proceeds a borrower may be eligible to collect.
How Can I Tell if I Require a LESA?
The results of a reverse mortgage loan applicant’s financial evaluation determine whether or not they need a LESA.
Lenders examine a loan applicant’s financial history to determine whether or not the applicant has the financial means to meet the reverse mortgage’s requirements.
The lender is specifically looking to see if the applicant has adequate residual income to cover the loan’s terms.
The amount of money left over after a lender deducts property taxes, homeowners’ insurance, and any debts or other living expenses from an applicant’s income and assets is known as residual income.
The applicant’s residual income is then compared to a government threshold amount based on area and family size to determine whether they have enough to pass the financial evaluation.
If the applicant passes this part of the financial evaluation, he can proceed with the reverse mortgage application.
But let’s say the applicant’s residual income is insufficient to meet the reverse mortgage charges as well as his or her ability to continue paying property taxes and insurance.
Depending on the size of the gap, the applicant may be allowed to proceed with the reverse mortgage, though a LESA would be required to cover the property expenses.
The money utilized to fund a LESA comes from the reverse mortgage’s overall principal limit.
At first look, this appears to be a drain on the overall reverse mortgage funds that a borrower may be able to receive throughout the term of the loan, but depending on the circumstances, a LESA can really be a windfall for borrowers.
Why a LESA Can Be Beneficial
Fully funded or partially funded LESAs are available. The lender levies property charges on behalf of the borrower using monies taken from the reverse mortgage loan proceeds in a Fully Funded LESA.
A Partially Funded LESA will cover a portion of the property charges for borrowers who appear capable of paying a portion of these necessary obligations.
To help meet these necessary duties, the borrower will get semi-annual installments from their loan profits in this situation.
Borrowers are responsible for timely payment of all property charges, not the servicer.
Qualifying borrowers who are concerned about having to pay their monthly taxes and insurance obligations can voluntarily request that their reverse mortgage servicer set up a LESA to cover these ongoing costs.
Even if you have enough residual income to cover these costs, you might choose to put up a voluntary LESA that allows your lender to do so.
What would require a borrower to have a LESA?
To reduce the risk of default, FHA requires the lender to set up a LESA to ensure that the required property charges are paid for the borrower’s remaining estimated lifespan. If an applicant has excellent credit, they’ve already demonstrated a financial willingness to maintain their financial obligations.
What is a concern when setting up a LESA?
What are the disadvantages of LESA? 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.
Why might a LESA be necessary?
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.
How does a LESA work?
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.
How long can you live in a house with a reverse mortgage?
How Long Can I Be Away from Home with a Reverse Mortgage? The rules state that you must live at a property for the majority of the year for it to qualify as your principal residence. This means that you can’t be away for more than six months at a time for nonmedical reasons.
Why did HUD introduce the LESA?
HUD introduced LESA to reduce the likelihood that borrowers would default on their loans because of a failure to pay taxes and insurance, a problem that has long plagued the industry.
What is the downside of getting a reverse mortgage?
Cons of a reverse mortgage Reverse mortgages have costs that include lender fees (origination fees are capped at $6,000 and depend on the amount of your loan), FHA insurance charges and closing costs. These costs can be added to the loan balance; however, that means the borrower would have more debt and less equity.
What does set aside mean in a reverse mortgage?
In some instances, borrowers may not fully meet HUD’S stated requirements, but they still give borrowers an opportunity to get a reverse mortgage loan with a set aside for taxes and insurance. A set aside is when the lender has to put funds aside from the reverse mortgage loan and make them unavailable to the borrower.
What is a partial LESA?
To qualify for a partial LESA, a borrower demonstrates a willingness to meet financial obligations but does not meet residual income requirements.
What is a reverse mortgage LESA?
A reverse mortgage is a unique loan that allows those 62 years of age and older to convert a portion of the equity they have built up in their homes into cash and defer repayment until they pass away or move out.
Can you walk away from a reverse mortgage?
With the non-recourse aspect of reverse mortgages, the borrowers or their estate do not have to pay back more than the value of the home, even if the loan balance is higher. In these circumstances, the borrower (or estate) can grant a “deed in lieu” and walk away from the obligation of selling the home.
How much money do you actually get from a reverse mortgage?
The amount of money you can receive from a reverse mortgage generally ranges from 40-60% of your home’s appraised value. The older you are, the more you can receive, as loan amounts are based primarily on your life expectancy and current interest rates.
Can you sell your house if you did a reverse mortgage?
Yes, you can sell a house with a reverse mortgage. Your lender cannot force you to sell the home, but you are able to sell it at any time if you choose to do so. However, keep in mind that when you sell the home, your reverse mortgage comes due — and you’ll need to pay off the loan balance, plus interest and fees.
When can you use asset dissipation on a reverse mortgage?
Asset dissipation is useful for anyone with limited employment income. Retirees, self-employed, or even unemployed customers are able to show steady income to prove they can pay the monthly payments on the loan. An asset dissipation loan allows you to qualify for a loan even if you do not have employment income.
Is reverse mortgage a good idea for seniors?
If you’re an older homeowner who plans to stay put, a reverse mortgage may be a sensible way to help fund your golden years. This is especially true for seniors whose spouses are also over age 62 and can be listed as co-borrowers on the loan.
Can a family member pay off a reverse mortgage?
Anybody can pay off a reverse mortgage, including the borrower, their spouse, their heirs or other relatives. This is most common in scenarios where the last surviving borrower or eligible non-borrowing spouse dies, and the heirs choose to pay off the loan.
Can you pay off a reverse mortgage at any time?
There are no prepayment penalties on reverse mortgages. In most cases, there’s a contract of up to ten years that allows you and other homeowners to pay off the loan balance at any time without penalty.
Does reverse mortgage affect Social Security?
A reverse mortgage does not affect regular Social Security payments or disability benefits. However, if you are on Supplemental Security Income (SSI), any reverse mortgage proceeds that you receive must be used immediately. Funds that you retain count as an asset and could impact eligibility.
Do reverse mortgages show up on credit report?
No. In fact, reverse mortgage lenders don’t typically report to credit agencies. After all, it’s hard to be late on your monthly mortgage payments when such payments are not required.
