Saturday, April 21, 2018

Should I Get a Voluntary Life Expectancy Set Aside (LESA) Even If I Don’t Need It?

A Life Expectancy Set Aside (LESA) — think escrow account for property taxes and insurance — might be mandatory for some reverse mortgages to be approved, but that’s not the only reason to have one.

Most borrowers looking to secure a reverse mortgage proceed with a LESA to satisfy financial assessment rules required by the Department of Housing and Urban Development (HUD), but you may also include one in your loan voluntarily.

Read on to understand when a LESA is mandatory, and why a voluntary LESA might benefit you even if it’s not mandatory.

When Is a LESA Mandatory?

As the years go by, reverse mortgages continue to evolve. If you’re 62 and older, a reverse mortgage allows you to use your home — fully paid off or not — to gain access to your equity and turn it into cash you can use. 

Although early reverse mortgages had no income or credit requirements, things have changed in recent years, although these requirements are still much easier to meet when compared to conventional financing.

For loans originating after April 27, 2015, the Federal Housing Administration (FHA) has increased requirements for borrowers. These requirements include reverse mortgage counseling and a financial assessment to make sure you can successfully meet the obligations that come with the adoption of a reverse mortgage. 

In addition to age, ownership, and sufficient loan-to-equity ratios, you must also satisfy the following three requirements if you want a reverse mortgage:
  1. Your property tax payments must be paid and up to date.
  2. You must maintain a homeowner’s insurance policy.
  3. You must maintain your home up to FHA standards.

You must also show sufficient income to be able to cover your housing expenses with money left over at month’s end. If you can’t, you need a LESA.

LESAs help protect loan distributors from borrowers who might otherwise be at risk of default. That’s because the LESA is based on your life expectancy from the time of loan initiation, and consists of an escrow account. 

This escrow account sets aside money from your home equity to cover future payments — for property taxes and homeowner’s insurance — in advance by securing this money in an external account, so you can be sure you meet future loan obligations.

Is a LESA Always Required?

You might not need a LESA. A financial assessment conducted at the time of your loan application determines whether you’re at risk of defaulting — and therefore required to include a LESA in your reverse mortgage.

These assessments include a credit and financial ability review. If you’re late on mortgage or installment loans, a LESA may be required to compensate for your bad credit. 

What’s more, if a lender determines that your residual income — that is, what’s left after you’ve paid all your monthly obligations — is not enough to cover the financial requirements of the loan (or is below predetermined thresholds), the lender may require a LESA to ensure those funds are available for future property and insurance payments.

Why Would I Want to Secure a Voluntary LESA?

Even if the rules don’t require it, you can secure a voluntary LESA for your own purposes. There are a few situations where this avenue is worth exploring.

A LESA may mean less cash-in-hand, but it also means greater security if you’re concerned about meeting future loan requirements. A LESA provides a set-it-and-forget-it option for those who don’t want the trouble of remembering to stash money away for future payments. 

By adopting a worry-free way to set money aside, you can rest assured that you won’t miss future tax and insurance payments and unintentionally default on your loan.

Issues with bad credit often prevent borrowers from securing traditional loans, but reverse mortgages can be much more forgiving, even without a LESA. 

The new LESA option can help you sequester funds and automate payments, making monthly bill paying and financial planning a less stressful experience.

Factors to Consider When Opting for a LESA

If you do decide to opt for a voluntary LESA, there are a few considerations that you may want to bear in mind before you take the next step.

Fewer Upfront Funds

The process of setting up a LESA involves appropriating some of the total cash available into a fund that is set aside for specific payments. The amount can vary depending on your age, and your individual insurance and property taxes.

If the LESA is a large amount of the total proceeds, then opting for a voluntary LESA can put a dent in the total cash made available by your reverse mortgage loan. If covering large home repairs or paying off debt is your incentive for taking out a reverse mortgage, allocating funds towards an optional LESA may not be ideal. 

Additionally, if you still have a significant forward mortgage, the amount of principal funds may be so little that a reverse mortgage becomes impractical, or impossible.

Greater Peace of Mind

With a LESA, you can trade some of the financial management of future property and insurance bills for peace of mind, because you can pay for these expenses with your existing equity without having to touch your monthly income streams. 

This reduces the burden of monthly bill payments and provides you with reassurance that your loan is secure and your future home payments are accounted for.

Adding this peace of mind can be a great relief, especially if you’re looking to reduce your monthly bills and take further financial responsibilities off your plate. 

A LESA can make income and expenses less convoluted, and more of your monthly income can stay in-pocket at the end of the month, while the LESA takes care of the bill-paying process.

If you would feel more comfortable knowing that monthly taxes and insurance payments are being handled by your lender — even with sufficient income to cover these payments yourself — a voluntary LESA could be just what you need.

Contributed by: Mehran Aram, a graduate from the University of San Diego School of Business in 1984, founded Aramco Mortgage in 1998 after spending almost five years in the industry. Today, Mehran Aram is President and CEO of The Aramco Group, and has recently been honored with the distinction of CRMP(Certified Reverse Mortgage Professional) a certification held by less than 50 brokers nationwide. Mr. Aram currently heralds the title of “Mortgage Analyst” on San Diego radio stations: AM 600 KOGO, AM 760 KFMB, AM 1170 KCBQ, AM 1210 KPRZ, FM 98.1, and Fox News Monterey’s AM 1460. Garnering endorsements across the state of California, including from radio personalities, Roger Hedgecock, George Chamberlin, Mark Larson, and Ladona Harvey, Mehran Aram along with his nearly 20 years of industry experience has effectively become California’s Mortgage Expert in reverse mortgages, refinances and purchase loans, among many other loan products.

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