Understanding the LESA
The Life Expectancy Set Aside (LESA) is a feature of the HECM program that ensures borrowers can meet their property tax and insurance obligations throughout the life of the loan. While it reduces your available proceeds, it provides important protection against default.
What Is a LESA?
A LESA is a portion of your HECM proceeds set aside at closing to pay for property taxes, homeowners insurance, and flood insurance (if applicable) over your expected lifetime. The funds are held by your loan servicer and disbursed on your behalf as these obligations come due.
When Is a LESA Required?
A LESA may be required based on the results of your financial assessment. During the application process, your lender evaluates your credit history, income, assets, and property charge payment history. If the assessment indicates you may have difficulty paying property charges on your own, a LESA will be required.
Types of LESA
There are two types of LESA: a fully funded LESA, where the entire estimated amount for property charges is set aside, and a partially funded LESA, where a portion is set aside and you make up the difference with your own funds. The type assigned depends on the severity of concerns identified during financial assessment.
How It's Calculated
The LESA amount is based on your life expectancy (from HUD actuarial tables), your annual property tax and insurance costs, and an assumed growth rate for these expenses. The total amount is set aside from your principal limit at closing, reducing the net funds available to you.
Impact on Your Proceeds
A LESA reduces your available proceeds because the set-aside amount comes from your principal limit. For borrowers with high property taxes or insurance premiums, this reduction can be significant. However, it also provides peace of mind that these critical obligations will be met.
Avoiding a LESA
The best way to avoid a LESA requirement is to maintain a strong payment history for property taxes, insurance, and other housing obligations. Demonstrating adequate residual income and a satisfactory credit history also helps. Discuss strategies with your advisor before applying.
