And How it Impacts Your Transaction
The requirement for a LESA (Life-Expectancy Set Aside ) was released with other financial assessment guidelines by the Federal Housing Administration (FHA) in 2014. A LESA isn’t required for everybody seeking a reverse mortgage. It’s only used for those with bruised credit or limited income, to ensure that they can keep up with the payments that their reverse mortgage (such as a HECM) might require they pay, such as property taxes and insurance.
Setting up a LESA involves setting aside a certain chunk of the initial principal limit, into a designated place that is solely meant for the payment of those required payments. Neglecting to pay these charges with a HECM risks a default of the loan. The exact amount of the chunk that is set aside varies widely between borrowers, as it is based on three factors:
- Their borrowers age,
- Property taxes
- Insurance costs.
How much is set aside in a LESA depends on these , and if these factors are low, the amount in the LESA will be low as well. Because of how much these factors can vary and affect the amount the borrower can receive in the reverse mortgage loan, a high enough LESA can actually make the reverse mortgage unworkable. This happens in the case of a large remaining mortgage balance, which would leave little in the way of an initial principal limit. In this scenario, the principal limit wouldn’t contain enough to create a LESA. This means the loan would be short to close, and the borrower would need to make up the difference with their own money.
In an ideal scenario, a borrower would not need a LESA. To make the ideal a reality, the borrower must demonstrate that both of the following is true for them:
- They have a willingness to keep up with financial obligations (based on a credit analysis)
- They have the financial ability to keep up with financial obligations (based on income analysis)
To meet the requirement for financial willingness, the borrower must show that they have excellent credit. If they have a great credit history, chances are that a LESA will not be required. However, if they have a few dings on their score, it is still possible to avoid a LESA if they aren’t serious. For instance, if there’s a late payment or two on a credit card, it’s not considered too serious. Late payments on a mortgage, however, will stand out and most likely require a LESA unless extenuating circumstances can be documented.
Financial ability is determined by the lenders when they look at a borrower’s residual income (the amount leftover after monthly obligations are paid). Those monthly charges can include property taxes, homeowners insurance, and homeowners association dues. The residual income is figured by adding up the monthly income the borrower brings in, and then deducting debt payments (excluding mortgage payments that will be eliminated by the reverse mortgage), monthly property charges, and estimated utility costs based on the home. That leftover residual income must meet a threshold determined by the region the borrower lives in and how many people live in the home. If the residual income isn’t enough at this point, it’s possible to still continue and qualify using compensating factors.
If compensating factors are used, and the residual income is still too short to meet the requirement, the lender may decide to approve the loan with a LESA but only if they determine that it’s still within their acceptable thresholds. If it still doesn’t meet their standards after applying the compensating factors, it’s likely the loan will not be approved.
It’s important to note that a consumer’s bad credit score doesn’t automatically mean they won’t qualify for a HECM. Credit scores don’t count as a separate criteria, and if they have lots of collections or charge-offs on their credit, it likely won’t be an issue. The guidelines for lending a reverse mortgage are much more forgiving than a traditional forward home loan. Keep in mind that even those with more than a few dings on their credit can often qualify for a reverse mortgage without a LESA – as long as they otherwise pass the financial assessment. If you are looking for a Houston Reverse Mortgage Loan Officer, or a loan in another area, please contact us or search for lenders and loan officers in your area.