A Life Expectancy Set-Aside (LESA) is a mandatory savings account, funded with your own reverse mortgage proceeds, that your lender requires if they believe you might struggle to pay future property taxes and homeowners insurance. It is a direct result of a federally mandated financial review designed to prevent homeowners from defaulting on these critical expenses.
The core conflict is rooted in the Reverse Mortgage Stabilization Act of 2013. This federal law led the Department of Housing and Urban Development (HUD) to create a mandatory Financial Assessment for all reverse mortgage applicants. This rule creates a painful catch-22: the LESA, designed to prevent foreclosure, can lock up so much of a senior’s home equity that it makes the reverse mortgage unworkable, blocking them from the very financial relief they need.
This change was a direct response to a crisis. Before the rule, nearly 10% of all reverse mortgage borrowers were at risk of foreclosure simply because they had fallen behind on their property tax and insurance payments. Since the Financial Assessment and LESA were implemented, studies show these defaults have plummeted by over 75%, making the program far more stable.
Here is what you will learn by reading this guide:
- 🏦 The Financial Test You Must Pass: Understand the two-part Financial Assessment that every reverse mortgage applicant must go through and what lenders are really looking for.
- 🤔 Two Types of LESA and Their Triggers: Discover the difference between a “Fully Funded” and “Partially Funded” LESA and the specific credit or income issues that require them.
- ➗ The Hidden Math and Its Flaws: See how a LESA is calculated and learn about the outdated numbers in the formula that could cause your funds to run out sooner than you think.
- ✅ Mistakes That Can Cost You Your Home: Learn the five most common mistakes people with a LESA make and how to avoid them to protect your home and your finances.
- 🤝 Who’s Who in the Process: Clearly understand the specific roles and responsibilities of the borrower, lender, servicer, and counselor when a LESA is involved.
The Two Pillars: Understanding the HECM Loan and Your Core Duties
The most common type of reverse mortgage in the United States is the Home Equity Conversion Mortgage (HECM). This is the only reverse mortgage insured by the Federal Housing Administration (FHA), an agency within HUD. It is available exclusively to homeowners aged 62 and older.
The main attraction of a HECM is that you are not required to make monthly mortgage payments to the lender. Instead, the loan balance grows over time and is typically paid back only when the last borrower sells the home, moves out, or passes away. This allows you to turn your home equity into cash without the burden of a monthly payment.
This benefit comes with a critical, non-negotiable responsibility. As the homeowner, you must continue to pay all property charges on time for the life of the loan. These charges primarily include your property taxes and homeowners insurance premiums.
Failure to pay these expenses is a loan default, which can lead to foreclosure. This is the single biggest reason why the federal government stepped in to create the financial review process that leads to a LESA.
| Feature | HECM Reverse Mortgage | Proprietary Reverse Mortgage | |—|—| | Insurance | Insured by the Federal Housing Administration (FHA) | Privately offered; not FHA-insured | | Age Requirement | 62 or older | Varies by lender, can be as low as 55 | | Loan Limit | Capped by the FHA ($1,149,825 in 2024) | Can be much higher, for high-value homes | | Financial Assessment | Mandatory federal Financial Assessment is required | Not subject to the same federal assessment rules | | LESA Requirement | May be required based on the Financial Assessment | Not a federal requirement |
The Gatekeeper: How the Mandatory Financial Assessment Works
Before 2015, lenders did not systematically check if a senior could afford future tax and insurance bills. This led to a wave of defaults that put the FHA’s insurance fund at risk of insolvency, with losses estimated in the billions. In response, HUD created a mandatory financial check-up for every HECM applicant, effective for all loans with case numbers assigned on or after April 27, 2015.
This Financial Assessment is a holistic review of your finances designed for the realities of retirement. It is not a simple credit score check. Instead, it is broken down into two core components: your “willingness” and your “capacity” to pay your bills.
Component 1: Proving Your “Willingness” (Your Credit History)
This part of the assessment looks at your past behavior to predict your future actions. The most important thing to know is that there is absolutely no minimum FICO score required to get a HECM reverse mortgage. Lenders are more interested in your recent payment patterns.
To have “satisfactory credit,” you generally must meet these standards :
- You have made all housing payments (mortgage or rent) and installment loan payments (like car loans) on time for the past 12 months.
- You have no more than two 30-day late payments on those accounts in the past 24 months.
- You have no “major derogatory credit” on your revolving accounts (like credit cards) in the past 12 months.
HUD defines “major derogatory credit” as any single payment on a revolving account that was more than 90 days late, or three or more payments that were over 60 days late. If your credit report shows these issues, it signals a potential lack of “willingness” to pay your obligations.
If you fail this part of the assessment, the consequence is severe. To get the loan, the lender will require you to have a Fully Funded LESA, the most restrictive type. You may be able to avoid this if you can provide documented extenuating circumstances, such as a major medical event, job loss, or the death of a spouse, that directly caused the credit problems.
Component 2: Proving Your “Capacity” (Your Residual Income)
This part of the assessment measures your financial ability to handle ongoing expenses. It does not use a traditional debt-to-income ratio. Instead, it calculates your residual income, which is the amount of cash you have left over each month after paying all your major bills.
HUD sets minimum residual income thresholds that you must meet, which vary based on your family size and where you live in the country. Lenders will verify all your reliable income sources, including Social Security, pensions, investment income, and distributions from retirement accounts like 401(k)s or IRAs.
| Family Size | Northeast | Midwest | South | West |
| 1 | $540 | $529 | $529 | $589 |
| 2 | $906 | $886 | $886 | $998 |
| 3 | $946 | $927 | $927 | $1,031 |
| 4 or more | $1,066 | $1,041 | $1,041 | $1,160 |
| Source: 2025 Regional Residual Income Requirements |
If your regular income isn’t enough, lenders can use a powerful tool called Asset Dissipation. This process allows the lender to convert a portion of your verified liquid assets (like savings, stocks, or even the cash you’ll get from the reverse mortgage itself) into a monthly income stream for qualification purposes. For example, if you have $120,000 in a savings account and a 20-year life expectancy (240 months), a lender can add $500 to your monthly income ($120,000 / 240) for the calculation.
If you fall short on the residual income requirement, the lender will likely require a Partially Funded LESA. You may be able to avoid this if you have compensating factors, such as documented income from a non-borrowing spouse or a long history of paying property charges on time without issue.
The LESA Explained: Your Home’s Forced Savings Account
A Life Expectancy Set-Aside (LESA) is a portion of your total reverse mortgage funds that is withheld at closing and placed into a restricted account. Its only purpose is to pay for your future property taxes and homeowners insurance premiums. You do not accrue interest on the money sitting in the LESA; interest is only charged on the funds as they are paid out to the tax authority or insurance company.
A LESA is not the same as a traditional escrow account on a forward mortgage. An escrow account is funded with ongoing monthly payments you make. A LESA is funded with a single, large, up-front contribution taken directly from your home equity at closing.
| Feature | LESA (Reverse Mortgage) | Traditional Escrow (Forward Mortgage) | |—|—| | Funding Source | A single, lump-sum withdrawal from your loan proceeds at closing. | Small, ongoing monthly payments included with your mortgage payment. | | Replenishment | The account is not replenished. Once the money is gone, it’s gone. | The account is analyzed annually and your monthly payment is adjusted. | | Impact on Borrower | Reduces the total cash or line of credit available to you from the start. | Increases your required monthly mortgage payment. |
The Two Flavors of Mandatory LESAs
When a LESA is required, its structure depends on why you need it.
- The Fully Funded LESA. This is required if you fail the “willingness” test due to an unsatisfactory credit history. With this type, your loan servicer takes complete control and pays your tax and insurance bills directly on your behalf. This is the most hands-off and secure option, as it removes the risk of you missing a payment.
- The Partially Funded LESA. This is typically required if you fail the “capacity” test due to insufficient residual income. With this type, the servicer sends you a check from the LESA funds twice a year to supplement your income. You are still responsible for making the actual payments to the tax authority and insurance company on time.
There is a critical rule tied to your loan’s interest rate. If you choose a fixed-rate HECM and a LESA is required, it must be a Fully Funded LESA. A Partially Funded LESA is only an option for adjustable-rate HECMs.
The Voluntary LESA
Even if you pass the Financial Assessment with flying colors, you can still choose to have a LESA. Many financially stable seniors opt for a voluntary, fully funded LESA for the convenience and peace of mind. It automates the payment of their largest property bills, simplifying their budget in retirement.
The Hidden Math and a Dangerous Flaw
The LESA calculation is complex, but it boils down to a formula that estimates the present value of your future tax and insurance payments. It considers your current annual property charges, the life expectancy of the youngest borrower, and a compounding interest rate.
A little-known feature is that the unused money in your LESA account grows over time. The growth rate is equal to your loan’s interest rate plus the annual mortgage insurance premium rate. This growth is designed to help the set-aside keep pace with inflation and rising costs over many years.
However, there is a dangerous flaw in this system. The formula used to calculate the LESA amount relies on life expectancy tables from 1979. People are living longer today, and in many parts of the country, property taxes and especially homeowners insurance costs are rising much faster than the LESA’s growth rate can handle. This means your “Life Expectancy Set-Aside” could run out of money long before you pass away, leaving you suddenly responsible for large bills late in life.
Real-World Scenarios: How a LESA Plays Out
The requirement of a LESA can dramatically change the outcome of a reverse mortgage. Here are three common scenarios.
Scenario 1: The Low-Income Borrower
Mary is 75, has a great credit history, and owns her $400,000 home free and clear. Her income from Social Security is low, and after calculating her expenses, her residual income falls just short of HUD’s requirement for her region.
| Lender Action | Borrower Responsibility |
| The lender approves Mary’s HECM with a Partially Funded LESA. | Mary remains responsible for paying her tax and insurance bills herself. |
| A portion of her loan proceeds are set aside into the LESA. | She must use the funds disbursed from the LESA to pay those bills on time. |
| The loan servicer will mail Mary a check from her LESA twice a year. | If she mismanages the funds and misses a payment, she will be in default. |
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Scenario 2: The Borrower with Blemished Credit
John is 68 and has a high income from his pension and investments, easily meeting the residual income test. However, a few years ago he went through a difficult period and missed several credit card payments, resulting in “major derogatory credit” on his report. He cannot provide a documented extenuating circumstance.
| Servicer Action | Borrower’s Experience |
| The lender approves John’s HECM with a mandatory Fully Funded LESA. | John’s responsibility for paying taxes and insurance is completely removed. |
| The loan servicer automatically pays the property tax and insurance bills directly. | He has less available cash from his loan, but gains “set and forget” peace of mind. |
| The servicer sends John monthly statements showing the LESA balance and payments made. | He never has to worry about budgeting for or missing these large, crucial payments. |
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Scenario 3: The Borrower with a High Mortgage Balance
David is 65 and has a $300,000 home, but he still owes $150,000 on his original mortgage. His financial assessment shows he needs a LESA due to poor credit. The calculation shows he needs $32,399 for the LESA.
| Loan Calculation | Outcome |
| Gross Loan Amount Available: $162,600 | Loan is Unworkable. |
| Less Closing Costs: -$5,500 | The total funds needed ($187,899) are more than the loan provides ($162,600). |
| Less Mortgage Payoff: -$150,000 | David would need to bring $25,299 in cash to the closing table to make the deal work. |
| Less Required LESA: -$32,399 | For most seniors seeking a reverse mortgage, this is not possible. |
| Cash Shortfall: ($25,299) | The LESA requirement made the reverse mortgage inaccessible for David. |
| Source: Example adapted from Premier Reverse Mortgages |
Living with a LESA: The Good, The Bad, and The Ugly
A LESA is a powerful tool with significant trade-offs. It provides security at the cost of liquidity.
| Pros | Cons |
| ✅ Peace of Mind: Automates payment of taxes and insurance, removing a major source of financial stress. | ❌ Reduced Loan Proceeds: Directly reduces the amount of cash or line of credit you can access from your home’s equity. |
| ✅ Budgeting Simplicity: Makes personal budgeting easier since you don’t have to save for large, infrequent bills. | ❌ Can Make the Loan Unworkable: For those with a large existing mortgage, the LESA can consume too much equity, making the loan impossible to close. |
| ✅ Ultimate Default Protection: It is the single best tool to prevent a tax and insurance default, the most common cause of reverse mortgage foreclosure. | ❌ Depletion Risk: You can outlive the funds in the LESA, leaving you responsible for payments again when you are older and potentially less financially able. |
| ✅ Convenience: Many financially secure borrowers choose a voluntary LESA simply to have their bills managed for them. | ❌ Inflexible: Once a LESA is established at closing, it cannot be removed for the life of the loan, even if your financial situation improves. |
Mistakes to Avoid with a LESA
- Forgetting About Other Property Charges. A LESA only covers property taxes and homeowners/flood insurance. You are still responsible for paying any Homeowners Association (HOA) fees, condo fees, or other local assessments. Forgetting these can still lead to default.
- Assuming the LESA Lasts Forever. The “Life Expectancy” name is misleading. Due to outdated calculations and rising costs, your LESA can run out early. Plan for the possibility that you will have to resume paying these bills yourself one day.
- Ignoring Your Monthly Statements. Your loan servicer will send you monthly statements detailing your LESA balance and any payments made. Review these carefully to track how quickly the funds are being used and to anticipate when they might be depleted.
- (For Partially Funded LESAs) Misusing the Money. If you have a Partially Funded LESA, the servicer sends you checks twice a year. This money is specifically for your taxes and insurance. If you spend it on other things and miss a tax payment, you are in default.
- Thinking You Can Change It Later. A LESA is permanent. It cannot be added to a loan after closing, and it cannot be removed once it is in place—even if it was voluntary. The decision you make at closing is final.
The Key Players and Their Roles in the LESA Process
Successfully navigating a reverse mortgage with a LESA requires understanding who is responsible for what.
- You, the Borrower: Your primary duties are to live in the home as your main residence, keep the property in good repair, and pay any property charges not covered by the LESA, like HOA dues. You must also return an annual occupancy certificate to your servicer.
- The Lender: The lender’s main role is up front. Their underwriter conducts the Financial Assessment and makes the official decision on whether a LESA is required and what type it will be, based on HUD’s strict guidelines.
- The Loan Servicer: After the loan closes, the servicer manages the day-to-day aspects. They administer the LESA account, send you monthly statements, and, for a Fully Funded LESA, make the tax and insurance payments directly for you.
- The HUD-Approved Counselor: Before you can even submit an application, federal law requires you to complete a counseling session with an independent, HUD-approved agency. The counselor’s job is not to sell you a loan but to provide unbiased education on how it works, the costs, the obligations, and potential alternatives.
State-Specific Rules and Nuances
While the HECM program is governed by federal HUD regulations, some states have additional requirements that can affect your experience.
For example, states like Massachusetts have historically required that reverse mortgage counseling be conducted face-to-face, not over the phone. California has its own specific set of rules regarding the counseling process that have changed over time. In Texas, both spouses must be at least 62 years old to be on the loan, which is different from the federal rule.
Additionally, the federal residual income requirements are adjusted for regional differences in the cost of living. The country is divided into four regions—Northeast, Midwest, South, and West—each with its own income thresholds. This means a borrower in California (West) needs to show more leftover income each month than a borrower in Kansas (Midwest) to pass the “capacity” test.
Frequently Asked Questions (FAQs)
Is a LESA the same as an escrow account? No. A LESA is funded with a single lump sum from your loan proceeds at closing. A traditional escrow account is funded with small, ongoing monthly payments you make to your lender.
Can I get a LESA even if I’m not required to? Yes. You can voluntarily choose to have a Fully Funded LESA for convenience and peace of mind, even if you pass the Financial Assessment. This is a popular option for many borrowers.
Can I remove a LESA after my loan closes? No. Once a LESA is established at closing, it is a permanent part of the loan and cannot be removed, even if it was set up voluntarily.
What happens to any unused money in my LESA? Unused funds are treated as money you never borrowed. They remain as equity in your home and are not added to the loan balance that needs to be repaid by you or your heirs.
What if my property taxes or insurance costs go up? The servicer will pay the higher bills from the LESA funds. However, this will cause the LESA to run out of money faster than originally estimated, as the initial amount is not recalculated after closing.
Does the LESA cover my Homeowners Association (HOA) fees? No. A LESA is strictly for property taxes and homeowners/flood insurance. You are still personally responsible for paying all HOA fees, condo dues, or other similar charges on time.
What happens when my LESA runs out of money? Your servicer will notify you that the funds are depleted. From that point forward, you become fully responsible for paying all future property tax and insurance bills directly out of your own pocket.
Do I need a good credit score to get a reverse mortgage? No. There is no minimum FICO score requirement. Lenders are more focused on your recent payment history for housing-related debts and property charges to determine your “willingness” to pay your obligations.