Reverse mortgages work differently than traditional mortgages, and that difference causes real confusion around escrow. Many homeowners assume their lender automatically covers taxes and insurance, the way a conventional escrow account might. That assumption can be costly.
This guide breaks down the escrow exemption, the Life Expectancy Set-Aside (LESA), and what happens if you fall behind on property charges.
Key Takeaways
- Reverse mortgages skip monthly escrow payments, but you still owe property taxes and insurance
- HUD's Financial Assessment can require a Life Expectancy Set-Aside (LESA) if you risk falling behind on property charges
- Missed property charges rank among the top causes of reverse mortgage default
- Plan for taxes, insurance, and other property charges with a loan officer before you close
What Is the Escrow Rule for Reverse Mortgages?
Here's the key fact: HECM reverse mortgages are exempt from the CFPB's Higher-Priced Mortgage Loan (HPML) Escrow Rule under Regulation Z. Under 12 CFR 1026.35(b)(2)(i)(D), a reverse mortgage does not require an escrow account the way a conventional higher-priced loan does.
The exemption only removes the escrow mandate. You remain fully responsible for:
- Property taxes
- Homeowners insurance
- HOA fees, ground rents, and other property charges
The Life Expectancy Set-Aside (LESA)
Instead of a traditional escrow account, HUD's Financial Assessment process may require a Life Expectancy Set-Aside, or LESA. During underwriting, HUD reviews your credit and income history for risk of falling behind on taxes and insurance. If that risk is present, a portion of your loan proceeds is set aside to cover those costs.
LESA sizing is based on:
- Youngest borrower's projected life expectancy
- Current tax and insurance costs
- A 120% growth factor for future increases
Fully Funded vs. Partially Funded LESA
| Feature | Fully Funded LESA | Partially Funded LESA |
|---|---|---|
| Who pays the biller | Mortgagee pays taxes/insurance directly | Borrower receives semiannual payments and pays the bill |
| When it's required | Poor credit/payment history with no valid explanation | Willingness shown, but income falls short of HUD's threshold |
| Borrower's remaining duty | Other property charges (HOA, etc.) | Remaining shortfall plus other charges |
Unlike a traditional escrow account, a LESA generally cannot be adjusted or replenished once it is set.
If taxes or insurance rise faster than projected—or the set-aside runs low later in life—you cover the shortfall. Plan for that long-term risk up front.
How HUD's Rules Aim to Prevent Foreclosure
HUD has built several protections into reverse mortgage rules to keep borrowers and their spouses in their homes longer.
Non-borrowing spouse protections. Under Mortgagee Letter 2021-11, an eligible non-borrowing spouse can remain in the home during a borrower's extended stay in long-term care, or even after the borrower's death. The home must stay their principal residence, and other program conditions must continue to be met.
Loss mitigation before foreclosure. If you fall behind on property charges, your servicer can't jump straight to foreclosure. HUD requires lenders to offer options first, including:
- A repayment plan to reimburse advanced funds over time
- A referral to HUD-approved housing counseling
- Alternatives like refinancing, sale, or deed in lieu of foreclosure
Notice requirements. Servicers must send a due-and-payable notice and give you a 30-day window to respond before pursuing further action.
According to a GAO report from 2019, borrower-default terminations rose from 2% in fiscal year 2014 to 18% in fiscal year 2018. Most involved occupancy issues or unpaid taxes and insurance—the same property-charge gaps these HUD safeguards are meant to catch early.
What Happens If You Fall Behind on Property Charges
If you miss a tax or insurance payment, your servicer doesn't just let it slide. Here's the typical sequence:
- Corporate advance. The lender pays the missed charge using its own funds and adds that amount to your loan balance.
- Default status. Once available credit under your loan is exhausted, the loan is considered in default, and the servicer must request due-and-payable approval from HUD.
- Cure and reinstatement. You can often cure the default and reinstate the loan, though servicers may deny reinstatement if you've already reinstated within the past two years.
The best move is to act early. If you're facing financial hardship, contact your servicer immediately. Don't wait for a notice to arrive.
Working with a knowledgeable loan officer before you close—like the team at Excel Mortgage Services—can help you understand these risks and build a plan so default never becomes likely.
Reverse Mortgage vs. Traditional Escrow: Key Differences
Traditional mortgage escrow accounts collect a portion of your payment every month for taxes and insurance. Reverse mortgages don't work that way.
- Traditional escrow: Monthly collections, with annual analysis to adjust for shortages or surpluses
- LESA: A one-time set-aside calculated at closing, with no annual rebalancing
- Self-pay (no LESA): Full personal responsibility for taxes and insurance going forward
This distinction matters most for borrowers without a LESA. There's no lender-collected cushion sitting there for you. You need to budget carefully on your own, because nobody is automatically setting money aside for your next tax bill.
How to Protect Yourself When Getting a Reverse Mortgage
Before you close, take a few steps that keep escrow and LESA from catching you off guard:
- Complete HUD-approved counseling. It's required for a reason. Use the session to fully understand escrow, LESA, and your ongoing property charge obligations.
- Ask for a clear breakdown. Request that your loan officer explain whether a LESA applies to your loan and exactly how it affects your available proceeds.
- Work with an experienced reverse mortgage professional. Someone who regularly handles these loans, such as Chris Bonnema at Excel Mortgage Services, can help you map out property charge obligations across your retirement years, not just at closing.
These loans can be a genuinely useful retirement tool. But going in with eyes open on the escrow and LESA rules keeps that tool from becoming a liability down the road.
Frequently Asked Questions
What is a better option than a reverse mortgage?
It depends on your goals. A HELOC, home equity loan, cash-out refinance, or downsizing can all work as alternatives. Each has a different cost structure and a different effect on your remaining equity.
What are the new rules for reverse mortgages?
HUD's 2021 update (ML 2021-11) expanded protections for non-borrowing spouses, allowing them to remain in the home under certain conditions. HUD's Financial Assessment and LESA requirements, in place since 2015, also continue to shape underwriting today.
What is the 95% rule on a reverse mortgage?
When a HECM becomes due and payable, the home can be sold for the lesser of the full loan balance or 95% of its current appraised value. Because HECMs are FHA-insured and non-recourse, heirs never owe more than that.
Do reverse mortgages require an escrow account like regular mortgages?
No. HECMs are exempt from the standard HPML escrow rule. However, HUD's Financial Assessment may require a LESA instead, which functions differently from a traditional escrow account.
What happens if I can't pay my property taxes on a reverse mortgage?
Your lender will typically make a corporate advance to cover the missed payment, adding it to your loan balance. If the shortfall continues, the loan can go into default, though loss mitigation options are available first.
Can a LESA account run out of money?
Yes. A LESA is calculated based on life expectancy projections, and it generally cannot be replenished. If costs rise faster than projected or you outlive the calculation, you could become responsible for taxes and insurance.
