What Is a Life Expectancy Set-Aside (LESA)? A Reverse Mortgage Guide for South Dakota Homeowners
A reverse mortgage can eliminate your monthly mortgage payment, but it doesn't cover every housing bill. Property taxes and homeowners insurance still come due. Falling behind on them is one of the few ways a reverse mortgage borrower can put the loan at risk.
That is where a life expectancy set-aside, or LESA, comes in. Some borrowers are required to have one. For others, it is an optional safety net worth a close look. Jeff Buum, a reverse mortgage specialist at Fairway Heartland in Sioux Falls, regularly walks homeowners and their adult children through this decision. Here is how a LESA works and how to tell if it fits your situation.
Reverse Mortgage Basics: What Stays Your Responsibility
Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs), which are insured by the FHA under HUD's Home Equity Conversion Mortgage program. A HECM lets homeowners 62 and older turn part of their home equity into a lump sum, monthly payments, a line of credit, or a mix of these. Jeff's page on reverse mortgage loans in Sioux Falls covers the basics.
With a HECM, borrowers don't have to make monthly principal and interest payments. The loan is repaid when the last borrower sells the home, moves out, or passes away. To keep the loan in good standing, the borrower must:
Live in the home as a primary residence
Keep the home in good repair
Pay property taxes, homeowners insurance, and flood insurance if required
Pay any HOA or condo dues
With a traditional mortgage, most people never think about taxes and insurance. The servicer collects a little extra each month, holds it in an escrow account, and pays the bills when they are due. A reverse mortgage has no monthly payment, so there is no standard escrow. Unless a LESA is in place, you pay those bills yourself.
For homeowners in Sioux Falls, Brandon, Harrisburg, and Tea, those bills are not small. South Dakota has no state income tax, so local governments rely heavily on property taxes. Many homeowners across the Sioux Empire have also seen insurance premiums climb after years of hail and wind claims.
Why HUD Added a Financial Assessment
Before 2015, qualifying for a HECM mostly came down to three things: being 62 or older, living in the home as a primary residence, and having enough equity. Lenders did not look closely at whether a borrower could keep up with taxes and insurance over the long term.
Some borrowers took all of their loan proceeds up front, spent them, and later could not pay their property charges. Unpaid taxes or insurance can lead to default and, in the worst cases, foreclosure. That is the opposite of what a reverse mortgage is meant to do: help older homeowners stay in their homes.
HUD responded with a financial assessment that took effect in 2015. Today, the lender reviews three areas:
Credit history: how you have handled debts and payments
Property charge history: whether taxes and insurance have been paid on time
Residual income: how much money is left each month after major expenses
The goal is not to turn people away. A borrower who falls short in one of these areas can often still get the loan. The lender simply sets aside part of the loan proceeds to cover future property charges. That reserve is the LESA.
What Is a Life Expectancy Set-Aside?
A life expectancy set-aside is a portion of your reverse mortgage proceeds held back to pay property taxes, homeowners insurance, and flood insurance (if required) over your expected lifetime. It does not cover HOA or condo dues. Those stay your responsibility.
How the Set-Aside Is Sized
The amount is based on your current yearly taxes and insurance, the youngest borrower's age, and interest rates. HUD's formula uses life expectancy tables to estimate how many years of bills it needs to cover. The older the youngest borrower, the shorter the projected period and the smaller the set-aside.
A LESA is not a lifetime guarantee. If you live well past your projected life expectancy, or if taxes and insurance rise faster than expected, the funds could run out. At that point, you would pay the bills from other money.
How the Unused Funds Work
Two features make a LESA more favorable than many people expect:
No interest until you use the money. Interest accrues only when you draw funds to pay a bill.
The unused balance grows. Money still in the set-aside grows at the same rate as the loan balance, which helps the reserve keep pace with rising costs.
The trade-off is simple: money in the LESA reduces the amount you can use for other goals, such as paying off an existing mortgage or building a line of credit for emergencies.
Fully Funded vs. Partially Funded LESA
There are two types of LESAs, and they work very differently.
Fully Funded LESA
The loan servicer pays your property taxes and insurance directly from the set-aside when they come due, much like an escrow account. You do not have to track due dates or write checks for those bills. A fully funded LESA is available on both fixed-rate and adjustable-rate HECMs.
Partially Funded LESA
The servicer releases money to you twice a year to help cover a gap in your residual income. You are still responsible for paying the taxes and insurance yourself. A partially funded LESA is only available on adjustable-rate HECMs.
| Feature | Fully Funded LESA | Partially Funded LESA |
|---|---|---|
| Who pays taxes and insurance | The servicer, directly | You, with help from twice-yearly payments |
| Usually required when | Credit or property charge history falls short | Residual income falls short |
| Available on | Fixed-rate and adjustable-rate HECMs | Adjustable-rate HECMs only |
| How much is held back | Full projected cost of taxes and insurance | Sized to your income shortfall |
How the Lender Decides Whether You Need a LESA
The financial assessment generally leads to one of three outcomes:
Credit, property charge history, and residual income are all acceptable: No LESA required. You can still choose one.
Credit or property charge history not acceptable: A fully funded LESA is generally required.
Residual income falls short: A partially funded LESA is generally required.
A few rules can change that result:
If the partially funded amount would be more than 75% of a fully funded LESA, the lender requires the fully funded version instead.
A fixed-rate HECM pays out as a single lump sum at closing, so any required LESA on a fixed-rate loan will be fully funded.
Extenuating circumstances, such as a medical emergency that caused late payments, can sometimes explain a credit issue. Compensating factors, such as significant savings, can sometimes offset a residual income gap.
If even a fully funded LESA would not solve the shortfall, the loan may not be approved.
Every HECM applicant also completes a counseling session with a HUD-approved counselor before applying. Running the numbers with a loan officer ahead of time helps you walk into that session knowing where you stand.
Why Some South Dakota Homeowners Choose a LESA on Purpose
Even when a LESA isn't required, a voluntary, fully funded LESA can make sense. It tends to fit well for:
Retirees who want fewer bills to manage. South Dakota property taxes are paid in two installments each year, due in April and October. A fully funded LESA takes those dates off your calendar.
Adult children helping a parent plan. If a parent is starting to have trouble keeping up with mail and bills, a LESA protects the home without anyone having to step in to manage payments.
Homeowners on a fixed income. Social Security and pension income do not always keep up with rising premiums and tax bills.
Here is a common scenario. A retired couple in Harrisburg, both in their mid-70s, has strong credit and enough income to qualify without a LESA. After watching a friend fall behind on property taxes following a spouse's death, they choose a fully funded LESA anyway. Their available line of credit is smaller, but their taxes and insurance are handled automatically. Whichever spouse outlives the other will not have to worry about those bills.
The cost is less available equity for other goals. For many families, that trade is worth it.
Frequently Asked Questions About LESAs
Does a LESA pay HOA dues?
No. A LESA covers property taxes, homeowners insurance, and flood insurance if required. HOA and condo fees stay the borrower's responsibility.
Can I be required to have a LESA if my credit is good?
Yes. Good credit does not rule out a LESA. If your residual income falls short, the lender may require a partially funded LESA on an adjustable-rate HECM.
Does needing a LESA mean my reverse mortgage was denied?
No. In most cases, a required LESA means you are approved with a set-aside that protects the loan and your home.
What happens if the LESA runs out?
You pay the taxes and insurance directly from other funds. Not paying them can put the loan in default, so it is worth planning for this possibility, especially if you expect to live well past average life expectancy.
Talk Through Your Reverse Mortgage Options with Jeff Buum
Jeff Buum is a Certified Retirement Mortgage Specialist at Fairway Heartland in Sioux Falls with more than 20 years in the mortgage industry. He helps homeowners 62 and older across Sioux Falls, Brandon, Harrisburg, Tea, and the rest of the Sioux Empire understand how a reverse mortgage works, whether a LESA will be required, and whether choosing one voluntarily makes sense. Adult children are always welcome to join the conversation.
If you are under 62 or want to compare other ways to use your equity, a cash-out refinance in Sioux Falls may be worth a look. For a broader view of every option, see mortgage loan programs explained.
A LESA is one piece of a bigger retirement plan. The best time to understand it is before you apply, not at the closing table.
Book a free consultation with Jeff Buum
Jeff Buum | Loan Officer | Fairway Home Mortgage, The Heartland Branch | NMLS #400290. Fairway Home Mortgage Corporation NMLS #2289. 7615 S. Kenton Lane, Suite 110, Sioux Falls, SD 57108. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers must complete counseling with a HUD-approved agency. The youngest borrower must be at least 62 years old. Borrowers must continue to live in the home as a primary residence, maintain the home, and pay property taxes, insurance, and other property charges, or the loan may become due. Monthly reverse mortgage advances may affect eligibility for some other programs. Not all borrowers will qualify. Information and programs are subject to change without notice. All loans are subject to credit and property approval. Equal Housing Opportunity.
