The Home Equity Conversion Mortgage (HECM) financial assessment, mandated by HUD's Mortgagee Letter 2014-07, scrutinizes two key factors: your history of paying housing obligations and your residual income after monthly expenses. Failing just one criterion triggers a partial Life Expectancy Set-Aside (LESA), while failing both results in a full LESA that can reduce available equity by tens of thousands of dollars. This article explains the triggers, calculation, and impact of the LESA, helping borrowers understand how to navigate the assessment and preserve their home equity.
What the Assessment Evaluates
The assessment has two components:
- Credit history on housing obligations: Lenders review your mortgage, property tax, and insurance payment history.
- Residual income: After deducting all monthly expenses from your income, HUD requires a minimum surplus based on family size and region.
Residual Income Thresholds HUD sets specific residual income minimums by family size and region. For example, a 2-person household in the Northeast must have at least $1,000 residual per month. If your surplus is below this threshold, you fail the residual income test.
Full vs. Partial LESA
- Partial LESA: Triggered by failing either the credit history or residual income test. It sets aside funds to cover property taxes and insurance for a period shorter than life expectancy.
- Full LESA: Triggered by failing both tests. It sets aside enough funds to cover taxes and insurance for the borrower's full life expectancy, dramatically reducing upfront available equity.
How the LESA Is Calculated The LESA is calculated by estimating annual property tax and insurance costs, multiplied by the borrower's life expectancy (based on HUD actuarial tables). For a full LESA, the entire amount is set aside from the loan proceeds. For a partial LESA, only a portion is reserved.
Cost Implications A full LESA can easily reduce available equity by $20,000–$50,000 or more, depending on property costs and borrower age. Borrowers should consult with a HUD-approved counselor to understand their specific assessment outcome and plan accordingly.
Passing the Assessment To avoid a LESA, borrowers must demonstrate a clean housing payment history and sufficient residual income. Steps include paying down debts, correcting credit report errors, and ensuring income documentation is accurate.
Quiz Time The video includes a knowledge check: "What happens if you fail both the credit and residual income tests?" Answer: You receive a full LESA.