FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides (04/29/2024)

FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides (04/29/2024)

i. Set-Asides (04/29/2024) i. Definition A Set-Aside refers to an amount of funds withheld by the Mortgagee from the Borrower’s HECM funds for payment of certain fees and expenses. Set-Aside types include: • Repair Set-Asides • Property Charge Set-Asides • Servicing Fee Set-Asides ii. Standard Set-Aside funds remain part of the Borrower’s HECM proceeds, are non-interest bearing, and must not be held in an escrow account. When the funds are disbursed, the Mortgagee must add the actual payments to the HECM balance. The Mortgagee must manage Set- Aside funds in accordance with requirements for each specific Set-Aside type. iii. Repair Set-Aside (A) Definitions Repair Set-Aside refers to an amount withheld from the HECM proceeds to fund repairs required to bring the mortgaged Property into compliance with MPS. (B) Standard When required repairs are completed and such completion is confirmed by the Mortgagee through an inspection, the Mortgagee shall release funds from the Repair Set-Aside and ensure that all mechanic’s and materialmen’s liens are released of record. The Mortgagee must only disburse funds from a Repair Set-Aside during a Deferral Period if the repairs are completed satisfactorily during the time period established in the Repair Rider, or within any additional time approved by HUD. (C) Required Documentation The Mortgagee shall retain copies of all inspections performed to ensure completion of the required repairs and copies of all invoices paid from the Repair Set-Aside in the Servicing File. iv. Property Charge Set-Aside (A) Definitions Property Charge Set-Aside refers to a portion of a Borrower’s Principal Limit that is designated for payment of Property Charges. A Property Charge Set-Aside can result III. SERVICING AND LOSS MITIGATION B. Title II Insured Housing Programs Reverse Mortgages 1. Servicing of FHA-Insured HECMs Handbook 4000.1 1454 Last Revised: 11/26/2025 from a Borrower being required to establish a Life Expectancy Set-Aside (LESA) or when a Borrower elects to have the Mortgagee pay Property Charges on their behalf. Fully Funded Life Expectancy Set-Aside (LESA) refers to a portion of the Borrower’s Principal Limit that is designated for payment of property taxes, including special assessments levied by municipalities or state law, Hazard Insurance, and, if applicable, Flood Insurance for the estimated remainder of the Borrower’s life expectancy. With a Fully Funded LESA, the Mortgagee makes payments directly to the billing agency. A Borrower can voluntarily elect to have a Property Charge Set- Aside created at closing. If the Borrower chooses this option, the Property Charge Set-Aside will function as though it were a Fully Funded LESA. Partially Funded Life Expectancy Set-Aside (LESA) refers to a portion of the Borrower’s Principal Limit that is designated for partial payment of property taxes, Hazard Insurance, and, if applicable, Flood Insurance for the estimated remainder of the Borrower’s life expectancy. With a Partially Funded LESA, the Mortgagee makes payments to the Borrower who is responsible for the remaining amounts owed and delivering the full payment to the billing agency. (B) Standard (1) Fully Funded Life Expectancy Set-Aside and Voluntary Election Property Charge Payment When servicing HECMs for which Property Charges are paid through a Fully Funded LESA, the Mortgagee must ensure that: • payments are disbursed before bills become delinquent. If the payments are disbursed after the bills become delinquent, the Mortgagee must pay any late fees, interest, and other charges from its own funds; • early payments are made to take advantage of a discount, whenever it is to the Borrower’s benefit; • LESA funds are not held in an escrow account; and • payments for LESA charges are added to the HECM balance when the Mortgagee disburses funds to the taxing authority, insurance carrier, or another entity that the property charge is owed to. The Mortgagee must provide the Borrower notification in writing that: • funds will be used to pay the taxing authority or insurance carrier directly; • the Mortgagee is responsible for making timely payments to the taxing authority or insurance carrier when funds are sufficient; • the projected amount of funds required to cover the allowed LESA charges over the estimated life expectancy of the youngest Borrower may be insufficient to cover LESA charges for the full length of that specified amount of time; • no funds will be available during any applicable Deferral Period for an Eligible Non-Borrowing Spouse (NBS); and III. SERVICING AND LOSS MITIGATION B. Title II Insured Housing Programs Reverse Mortgages 1. Servicing of FHA-Insured HECMs Handbook 4000.1 1455 Last Revised: 11/26/2025 • the Borrower is responsible for the payment of all Property Charges, including LESA charges, over the life of the HECM when funds are insufficient or the balance of the LESA is zero. (2) Partially Funded Life Expectancy Set-Aside When servicing HECMs for which funds are distributed to the Borrower from a Partially Funded LESA, the Mortgagee must ensure that: • funds are not held in an escrow account; • funds are disbursed to the Borrower semiannually; • the taxing authority and/or insurance carrier received the Borrower’s payment; and • the semiannual Disbursements to the Borrower are added to the HECM balance when disbursed. If the remaining Set-Aside funds are insufficient to make the next semiannual payment, or the Set-Aside balance is zero, the Mortgagee must, within 30 Days of receipt of a property charge bill: • notify the Borrower in writing that they are responsible for making all future payments with non-HECM funds; and • recommend to the Borrower that they contact a HUD-approved Housing Counselor to receive counseling services including viable alternatives to comply with the terms of the HECM. The Mortgagee must provide the Borrower notification in writing that: • the Borrower will receive semiannual payments from the Set-Aside, which must be used to pay the taxing authority and insurance carrier; • the Borrower is responsible for making timely payments to the taxing authority and insurance carrier over the life of the HECM; • the projected amount of funds required to cover defined Property Charges over the estimated life expectancy of the youngest Borrower and the income assumptions used to project semiannual distributions to the Borrower may be insufficient to cover LESA charges for the full length of that specified amount of time; • no funds will be available during any applicable Deferral Period for an Eligible NBS; and • the Borrower will no longer receive semiannual payments and will continue to be responsible for the payment of the Property Charges, including LESA charges, over the life of the HECM when funds are insufficient or the balance of the Set-Aside is zero. (3) Insufficient Property Charge Set-Aside Funds to Make Payment If the Property Charge Set-Aside funds are insufficient, the Mortgagee must use the remaining funds available in the Set-Aside and: III. SERVICING AND LOSS MITIGATION B. Title II Insured Housing Programs Reverse Mortgages 1. Servicing of FHA-Insured HECMs Handbook 4000.1 1456 Last Revised: 11/26/2025 • if the Borrower has a line of credit, deduct the remaining amount for the payment from the line of credit; or • if the Borrower does not have a line of credit, adjust the Borrower’s payment plan to accommodate the Disbursement. If funds are still insufficient, the Mortgagee must advance corporate funds and the HECM may be eligible to be called Due and Payable. (C) Required Documentation The Mortgagee must document in its Servicing File its efforts to obtain the billing information from the Borrower, billing agency, or the taxing authority. The Mortgagee must also: • maintain a transaction history that includes the amount and date of each Disbursement; • upload all transactions to HERMIT by the last Day of the month in which the Disbursement is made; and • retain date-stamped copies of all bills paid in the Servicing File. v. Servicing Fee Set-Asides (A) Definition Servicing Fee Set-Aside refers to an amount withheld from the HECM proceeds for the payment of the monthly servicing fee. (B) Standard Mortgagees must disburse funds each month from the Servicing Fee Set-Aside for any HECM that has a monthly servicing fee and add the amount disbursed to the HECM loan balance. (C) Required Documentation The Mortgagee shall maintain an accurate transaction history reflecting the monthly servicing fee disbursement and must upload the transaction to HERMIT monthly.

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