A reverse mortgage at 75, with taxes and insurance set aside

Twelve years of charges, priced the HUD way

A life expectancy set-aside, or LESA, is part of the principal limit of a HECM (Home Equity Conversion Mortgage, the FHA-insured reverse mortgage) that the servicer keeps to pay property taxes, homeowners insurance and flood insurance where required. The lender must require one when its financial assessment finds an unsatisfactory record of paying debts and property charges that no extenuating circumstance explains. The formula is in the HUD Handbook 4000.1: take 120 % of your current monthly charges, then the present value of that amount paid every month for the life expectancy of the youngest borrower, discounted at the expected rate plus the 0.5 % annual mortgage insurance premium (MIP).

The life expectancy comes from a table in Regulation Z (Appendix L to Part 1026). At 75 it reads 12 years, so the formula counts 144 monthly payments. For our owner, $4,800 a year is $400 a month, and the 120 % uplift makes it $480.00. Discounted at 6.65 % plus 0.5 %, those 144 payments are worth $46,590 today. That is the sum set aside, 36.2 % of a $128,650 principal limit.

The 120 % factor is HUD's allowance for charges that rise over the years. The discount works the other way: the account earns growth while it waits, so the lender holds back less than 12 full years of bills at today's price would cost.

The 183-day rule, written for a 75-year-old

The handbook rounds the age before reading the life table: if the next birthday falls less than 183 days after the estimated closing date, the borrower counts as one year older. Its own worked example is a 75-year-old in exactly that position, whose life expectancy becomes 11 years, or 132 months. The same rounding applies to the principal limit factor (PLF), so the two effects add up. Close shortly before turning 76 and the factor moves from 0.415 to 0.422 while the set-aside shrinks.

On the $310,000 home, being counted as 76 lifts the principal limit to $130,820 and lowers the set-aside to $44,045. The room that opens in month 13 rises from $9,670 to $13,083. HUD's Office of Inspector General found loans in its sample where this rounding may not have been applied (audit 2026-KC-0003), so the birth date on the application is worth checking against the closing date.

Where the set-aside hits your cash

The first 12 months are limited to 60 % of the principal limit, and the obligations paid at closing come out of that room. A set-aside counts there only for its first year of payments, which the HUD payment plan form enters on line 9 (HUD payment plan). For our owner that is $4,800, so the first-year cash falls by the same amount, from $65,890 to $61,090.

The rest of the set-aside, $41,790, goes on line 16 and is subtracted from what you can reach after the first year. Without it, $51,460 would open in month 13. With it, $9,670 does. Put simply, the first year looks almost normal and the later years carry the cost. Owners who count on that second-year room for a roof or a car should run the numbers with the set-aside before choosing.

The partial version, paid twice a year

When your payment record is clean but the residual income falls short, HUD's rule is a partially funded set-aside. It is sized on the monthly residual income shortfall, again times 1.2 and over the same 144 months. The servicer then sends you two payments a year, and you remain the one who pays the tax office and the insurer. If the partial amount would exceed 75 % of the full one, the lender must require the full set-aside instead.

With a shortfall of $150 a month, our 75-year-old would see $17,471 held back, well under the $34,943 threshold. First-year cash would be $64,090 and the room in month 13 $35,789, a much smaller cut than the full version makes.

Will the money last past 87?

The account is not frozen. It grows each month at one twelfth of the note rate plus the annual MIP, and pays the bills as they come due. In our projection, with the note rate held at 5.99 % and the charges never rising, about $21,676 would remain at 85 and the account would run out around age 91, a few years past the 12-year horizon.

Charges do rise, sometimes fast. In May 2026, the Inspector General estimated that 1,237 HECM borrowers will see their set-asides run out well before HUD expected, with a projected loss of $258 million to HUD if they cannot pay the charges themselves. The audit also points out that the life table behind the formula comes from US data for 1979-81. Once the account is empty, the loan stays in force, but taxes and insurance are again yours to pay, and a borrower who cannot pay them puts the loan in default, the risk the audit measured. The taxes and insurance page covers what follows, and the set-aside calculator page runs the formula for any age.