Residual Income, a Roof, and a LESA That Doesn't Fit
Harold, 72, is single and applies for a HECM. Gross monthly income is Social Security of $1,180 plus a pension of $150, or $1,330 per month ($15,960 a year). Annual property charges are taxes $3,900, hazard insurance $1,650, and HOA dues $1,200 - $6,750 a year. The appraisal is $480,000 and the applicable principal limit factor produces a principal limit of $190,080. The existing mortgage payoff is $28,000; closing costs and upfront MIP are $8,900; the servicing fee set-aside is $5,000. The appraiser requires a roof replacement estimated at $9,500 before closing. Credit shows one $2,300 medical collection from 14 months ago and no late housing payments; savings are $41,000. Your lender's residual income threshold for a one-person household is $900 per month. Harold wants $45,000 at closing for a car and a gift to his grandson, and he insists he will 'keep paying the taxes like always.'
1. Apply the financial assessment. Does Harold pass, and what changes the answer?
Read the worked answer
Run the residual income analysis both ways.
Without a LESA, property charges remain Harold's obligation: $1,330 - ($6,750 / 12 = $562.50) = $767.50 per month, which is below the $900 threshold. He fails.
With a LESA covering property charges, those charges are removed from his monthly obligations because the set-aside pays them: residual income = $1,330, which clears $900. He passes.
The conclusion: Harold is approvable only with a property charge set-aside. That is exactly the tool the financial assessment rules provide for this pattern - a borrower whose income covers daily living but not a large annual tax and insurance bill.
The $2,300 medical collection has no monthly payment, so it does not change the arithmetic. Document the explanation and apply the lender's written credit policy consistently; do not quietly ignore it. The key point is that the failure is not about loan size - it is about whether taxes and insurance will actually be paid after closing.
2. Calculate the fully funded LESA and the repair set-aside, and determine whether the loan can close as Harold wants it.
Read the worked answer
Full LESA = annual property charges x the LESA factor for his age: $6,750 x 20.5 = $138,375.
Repair set-aside = 150% of the appraiser's estimated cost: $9,500 x 1.5 = $14,250. The extra 50% protects against overruns; repairs must be completed within the required period and the funds are released as work is completed.
Mandatory obligations = $28,000 payoff + $8,900 closing costs/upfront MIP + $5,000 servicing set-aside + $14,250 repair set-aside = $56,150.
Total commitments = $56,150 + $138,375 = $194,525.
That exceeds the $190,080 principal limit by $4,445. So the loan cannot close with a fully funded LESA - there is nothing left for the payoff and costs, let alone $45,000 of cash. Telling Harold 'you qualify but only for zero cash' would be technically true but practically useless; the structure has to change.
3. Given the shortfall, what are the compliant paths forward and how do you document the file?
Read the worked answer
Use a partial LESA. Compute what Harold can genuinely pay: his residual must stay at or above $900, so he can absorb at most $1,330 - $900 = $430 per month, or $5,160 a year, of property charges. The LESA must therefore cover $6,750 - $5,160 = $1,590 a year x 20.5 = $32,595.
Recheck capacity: set-asides plus mandatory obligations = $56,150 + $32,595 = $88,745, leaving $101,335 of principal limit. Initial disbursement cap = the greater of 60% x $190,080 = $114,048 or $56,150 + $19,008 = $75,158, so $114,048 applies. Cash available at closing = $114,048 - $56,150 = $57,898 - enough for his $45,000.
Documentation:
- Written borrower election of the LESA amount and acknowledgment that he will pay the uncovered charges.
- The residual income worksheet showing the $430/month capacity.
- How the $41,000 in savings was considered (he may choose to use it; do not simply assume it).
- The repair agreement and completion timeline.
Never waive or shrink a LESA below the documented calculation just to make the numbers work, and never let the borrower's assurance that he 'always pays' substitute for the analysis.