If you have a reverse mortgage (HECM) in place with a LESA, and you outlive the LESA, what happens? Alternatively, say the LESA was calculated estimating that you would live to a certain age and pay the taxes and insurance, and you outlived the funds available in the LESA, what would happen in that case?
These are great questions and ones to which all borrowers with LESA accounts should know the answers. Firstly, if you pass and there are still funds that were set aside in the account that you never used, those funds are simply not owed. For example, if you had a $300,000 reverse mortgage but $75,000 was set aside in a LESA to pay taxes and insurance, you only had access to $225,000 of your loan. The remaining $75,000 is used as needed to pay taxes and insurance as they are needed. The only part of the $75,000 that becomes owed is money that is used to pay these costs and it only accrues interest as it is used to pay your expenses.
You do not owe interest on the funds set aside for payment until they are actually paid to the tax assessor or your insurance company and then only on that portion. The remaining funds continue to grow at the same line of credit growth rate the rest of your line of credit receives for money you have not yet taken from your line. This is one of the ways that the LESA account can set aside less money than would be required if the calculation just took your life expectancy and determined the dollar amount needed to pay your taxes and insurance for that time.
In this example, if your lender only used $25,000 to pay taxes and insurance on your behalf from your LESA. There would not be $50,000 that would be paid to your heirs. You simply never borrowed that money, so it does not have to be repaid when the loan is settled. When your heirs repaid the loan, the balance would be repaid on whatever portion of the remaining $225,000 your borrowed, plus the $25,000 the lender used from your LESA to pay taxes and insurance and the interest that accrued (plus any costs initially to obtain the loan that you financed). Let’s say you only drew $100,000 of your line of credit. The payoff would be $100,000 + $25,000 + accrued interest and any fees but not the remainder of the set aside.
What happens if you outlive your LESA?
In that case, your taxes and insurance become your responsibility again. Remember, the LESA stands for Life Expectancy Set Aside. That means the lender only sets aside enough funds for your “Life Expectancy”. The lender cannot set aside enough funds to be sure they are sufficient in all cases, or they would need to set aside sufficient funds to last until borrowers are over 100 years old as some borrowers do reach that milestone. This would all but exhaust too many borrowers’ ability to receive any money at all from their reverse mortgage loans.
The whole idea behind the LESA is to protect the borrower and HUD from the risk of default of non-payment of taxes and insurance. By allowing for the LESA, most borrowers are protected by covering them for their expected life and hopefully in those cases when the borrower does outlive the LESA account, the borrower will have time to prepare for that eventuality. Borrowers receive the disclosures at both application and closing, and they will receive monthly statements showing the status of the LESA account giving them ample opportunity to plan for the resuming payments in case they do exceed their life expectancy.
Borrowers with a LESA account must be cognizant of the fact that the LESA account will only remain for their life expectancy and that they could outlive the account. We have always advised that the reverse mortgage should allow borrowers to remain in their home comfortably and with just a small amount of planning, such as putting cash aside in small amounts early on, can help budget for this eventuality later (especially if you know you are healthy and come from a family with good longevity).