source:
  type: guide
  id: hud-4000-1-iii-i-set-asides
  authority: FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides
    (04/29/2024)
  description: FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides
    (04/29/2024).
  coverage_tier: operative
obligations:
- id: hud-4000-1-iii-i-set-asides-full
  canonical_id: hud-4000-1-iii-i-set-asides-full
  section: FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides
    (04/29/2024)
  type: do
  tags:
  - regulator-direct
  - fha
  - hud-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: FHA Single Family Housing Policy Handbook 4000.1, Part III — i. Set-Asides
      (04/29/2024)
    source_class: hud-handbook
    source_url: https://www.hud.gov/hud-partners/single-family-handbook-4000-1
    snapshot_id: 8c03836f77f317e1
    fetched_at: '2026-05-23T00:28:40Z'
    content_hash: sha256:411430f29b13f9b54a2ebb0e6f6e7087ecd2b90d0da22eb0c8c792eaa2d7d0df
    paragraph_quote: '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.'
  judgment: false
