Reverse mortgage scams: What they are and how to avoid them

Reverse mortgages can be helpful for older homeowners who have significant equity in their homes and want to convert it into supplemental income. That said, bad actors sometimes target seniors with misleading claims about how a reverse mortgage works. Before you take out this type of loan, here’s what you need to know, including some of the most common reverse mortgage scams to avoid.

Are reverse mortgages scams?

Not all reverse mortgages are scams, but some can be. To help you spot a scam and steer clear of reverse mortgage fraud, it’s helpful to understand how these loan products work and know what red flags to watch out for.

Unlike a mortgage where you take out a loan and gradually pay it back, a reverse mortgage — as the name implies — works in the opposite way. Your mortgage lender makes loan payments to you, based on a percentage of the value of your home, 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, and you don’t pay it back until you sell or move out of your home or pass away.

The most widely available reverse mortgage is the Home Equity Conversion Mortgage (HECM), 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 HECM in 2023 is $1,089,300.

There are also proprietary reverse mortgages from various lenders, who might offer higher amounts, but the fees could also be considerably greater.

To a large extent, reverse mortgage scams hinge not on the actual loan product but on the lender and other professionals involved in the process.

Reverse mortgage scam red flags to watch for

So, when is a reverse mortgage a ripoff? Here are some signs of a potential reverse mortgage scam to look out for:

• The scammer sends you an unsolicited offer.
• The scammer tells you it’s free money.
• The scammer can’t clearly explain the loan or how it will work.
• The scammer says they’re the only lender or salesperson you should talk to.
• The scammer tries to charge you upfront fees, potentially even just for getting information.
• The scammer says a reverse mortgage is the solution to all of your financial problems.
• The scammer tries to sell you a financial product.
• The scammer is pushy.
• The scammer tries to send you payments for a home you didn’t buy.

Ultimately, if you weren’t already looking into reverse mortgages, be very wary of anyone who approaches you and suggests this option.

Common reverse mortgage scams

Because reverse mortgages can be a ready source of cash, fraudsters might encourage seniors to apply by making misleading claims or committing outright fraud. They then pocket some or all of the money from the house’s liquidated equity.

Check out the following examples of pitches for these unsavory lending situations so you know when reverse mortgages are scams.

‘You can delay Social Security’

How it works: A lending pro, financial advisor or other self-professed expert tells a homeowner that they can take out a reverse mortgage at 62 to get an income stream now and delay taking Social Security until age 70.

Why it’s bad: Reverse mortgages usually cost more — from closing costs to associated fees — than the increase in your Social Security check if you wait until age 70, according to the Consumer Financial Protection Bureau. What’s more, you’ll have dumped the equity in your house, which limits your financial options moving forward.

‘You can buy a new home with no money down’

How it works: Be wary if you’re approached with a specific potential property to purchase. Many reverse mortgage scams center around con artists — often with the help of straw buyers — purchasing a distressed or abandoned property, then recruiting seniors to “purchase” the low-cost home by transferring the deed. They say you won’t have to exchange any money, a surefire sign that something’s fishy.

Why it’s bad: In this reverse mortgage fraud situation, the scammer usually “helps” the senior get a HECM with a lump-sum payment. Often, the scammer doesn’t actually fix up the new home, either. Things might look fine, but the senior finds serious issues upon moving in. Just as they’re discovering the deeper problems, the scammer vanishes with the lump sum from the HECM.

‘You can get free income’

How it works: An unsavory character tells a senior that a reverse mortgage gives them a free, no-strings-attached way to get an income stream.

Why it’s bad: Anyone who tells you that a reverse mortgage is free income is lying. This money isn’t free. Any money you get goes toward the balance of your loan payment. You’ll either need to pay that off when you move or, if you pass away, your family will need to settle the debt with your lender. Plus, reverse mortgages usually come with fees.

‘You can trust us’

How it works: Some reverse mortgage lenders hire celebrity spokespeople to lend credibility to their advertisements. But are reverse mortgages legitimate when a household name is behind them? Not necessarily.

Why it’s bad: While the product the spokesperson is touting could be legitimate — and you might even like or trust the celebrity’s claims — be sure to do your homework before committing to an offer.

‘You can do this without involving your spouse’

How it works: Scammers tell seniors they can get a reverse mortgage as the only borrower. They say the benefit is that you won’t have to involve your partner, troubling them with paperwork or meetings.

Why it’s bad: Even if the reverse mortgage is legitimate, if you pass away before your spouse, the loan becomes due. At that point, your partner could be forced to sell the house to repay the reverse mortgage.

‘All you need to do is sign here’

How it works: Some scammers could ask you to sign documents that have blank fields. Never sign documents with blanks, even if the other party claims they’ll fill them in later on.

Why it’s bad: The scammers could fill in anything in those blanks, allowing them to commit reverse mortgage fraud, such as outright transferring ownership of your home to them without giving you a cent.

‘You can make home improvements’

How it works: Scamming financial professionals aren’t the only ones behind predatory reverse mortgages. Contractors and home improvement pros can also be in play, suggesting a reverse mortgage as a method of payment for work they claim your home needs.

Why it’s bad: If you want to use your equity in your house for a remodel or addition, other options — like a home equity loan or home equity line of credit (HELOC) — can give you a much lower-risk path forward. Plus, these options usually cost less than reverse mortgages.

‘You can invest in this money-maker’

How it works: In this scenario, a scammer tries to get you to use money from a reverse mortgage for a “lucrative opportunity,” such as an annuity, life insurance policy or stocks.

Why it’s bad: Purchasing these products is usually not the smartest financial move, especially if you need the funds for other purposes, like healthcare costs. Remember: You are never required to purchase any sort of financial product, or invest in anything, to qualify for a reverse mortgage.

‘You won’t lose your house’

How it works: If you’re struggling to pay your mortgage, fraudsters might seem like they’re offering you a great alternative with a reverse mortgage. This loan product can feel like a welcome solution if you’re facing foreclosure.

Why it’s bad: Before you commit to a reverse mortgage, reach out to your lender. Many offer loan modifications when homeowners struggle to make their payments. This allows you to stay in your house without dumping your equity in it.

How to avoid reverse mortgage scams

Before you take out a reverse mortgage, speak with a U.S. Department of Housing and Urban Development (HUD)-certified housing counselor. Shop around for a reputable lender and check for complaints with the Better Business Bureau, as well.

“A legitimate reverse mortgage or a Home Equity Conversion Mortgage is insured by the Federal Housing Administration, so borrowers need to make sure that is the type of loan they are looking at,” says Jeff Taylor, co-founder and managing director at Mphasis Digital Risk.

If you’re interested in a reverse mortgage, consult with your current lender or a trusted financial advisor first, says Taylor. If your lender doesn’t offer reverse mortgages, they might still be able to point you to a reputable lender who does.

The same applies if you’re struggling financially and looking for a solution.

“If you are experiencing a financial hardship, contact your mortgage lender directly,” says Scott Sheldon, branch manager at New American Funding in Santa Rosa, California.

If you’ve found a reverse mortgage, done your research and solicited expert advice, it’s important to make certain you’ll have adequate income to cover your real estate taxes and homeowners insurance every year, too, as failure to do so is the biggest cause of foreclosures.

Finally, make sure you attend the closing and receive any payments personally.