Reverse mortgages can be helpful for older homeowners who have significant equity in their homes and want to convert it into supplemental income.
However, reverse mortgages are complicated, and unscrupulous lenders sometimes target seniors with misleading claims. Before you take out this type of loan, here’s what you need to know. In addition, we’ll look at some common reverse mortgage scams to avoid.
How reverse mortgages work
Unlike a traditional mortgage where you take out a loan and gradually pay it back, a reverse mortgage—as the name implies—works in the opposite way. The lender makes loan payments to you, based on a percentage of the value of your house, either in a lump sum, monthly installments or a line of credit (or a combination of these options). Instead of paying down a loan, your debt grows. You don’t pay back the loan until you sell your house. If you pass away, the lender sells the house to cover your debt, with any leftover funds going to your heirs.
The most widely available reverse mortgage is the home equity conversion mortgage (HCEM), which is issued by private lenders and insured by the Federal Housing Administration. This loan is available to homeowners who are 62 or older, have significant home equity and are living in their home. The maximum loan amount for a HCEM is $636,150. Proprietary reverse mortgages from various lenders may offer higher amounts, but the fees may be considerably greater.
Common reverse mortgage scams
Because reverse mortgages can be a ready source of cash, dishonest mortgage brokers or other swindlers may encourage seniors to apply by making misleading claims or committing outright fraud. Some pitches include:
- “Take out a reverse mortgage so that you can delay Social Security payments.” Some brokers will tell homeowners to take out a reverse mortgage at age 62 to make up an income gap while delaying Social Security benefits to age 70. But the Consumer Financial Protection Bureau has found that the loan costs exceed the cumulative increase in Social Security that homeowners would receive by delaying benefits. What’s more, borrowers who use this strategy may later find that they have limited options for moving to a new location.
- “Buy this low-cost property for no money down.” Con artists—often with the help of straw buyers—will purchase a distressed or abandoned property. Then they recruit seniors to “purchase” the low-cost property by transferring the deed to them for no exchange of money. The seniors move into the house and the swindlers help them obtain HCEMs with lump-sum payments that are based on an inflated appraisal. The perpetrators then find a way to abscond with the money at closing.
- “Free income with a no-risk reverse mortgage.” In reality, you receive loan payments, not income, which is why the money you receive from a reverse mortgage isn’t taxed. Ads taking this approach may not disclose the fees you’ll pay, either. And if you fail to pay property taxes or to maintain the property in good condition, you could lose your home.
How to protect yourself
Before you take out a reverse mortgage, speak with a housing counselor certified by the Office of Housing and Urban Development. Make certain that you’ll have adequate income to cover your real estate taxes and homeowner’s insurance every year, too, as failure to do so is the biggest cause of foreclosures. Shop around for a reputable lender and check for complaints at the Better Business Bureau. Finally, make sure that you attend the closing and receive any payments personally.