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, including some of the most common reverse mortgage scams to avoid.
How reverse mortgages work
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. The 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. You don’t pay back the loan until you sell your home. If you pass away, the lender sells the home to cover your debt, with any leftover funds going to your heirs.
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 2021 is $822,375. Proprietary reverse mortgages from various lenders might offer higher amounts, but the fees could also be considerably greater.
Common reverse mortgage scams
Because reverse mortgages can be a ready source of cash, dishonest mortgage brokers or other swindlers might encourage seniors to apply by making misleading claims or committing outright fraud. Some pitches include:
1. ‘You can delay Social Security’
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. 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 could later find that they have limited options for moving to a new location.
2. ‘You can buy a home with no money down’
Con artists — often with the help of straw buyers — will purchase a distressed or abandoned property, then 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 HECMs with lump-sum payments that are based on an inflated appraisal. The perpetrators then find a way to abscond with the money at closing.
3. ‘You can get free income’
Some advertisers claim you can obtain “free income” with a reverse mortgage. In reality, you receive loan payments, not income, which is why the money you receive isn’t taxed. Ads taking this approach might not disclose the fees you’ll pay, either, and the fact that if you fail to pay property taxes or maintain the property, you could lose your home.
4. ‘You can trust us’
Some reverse mortgage lenders hire celebrity spokespeople to lend credibility to their advertisements. 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.
5. ‘You don’t need to involve your spouse’
If you’re older than your spouse, be wary of being steered toward being the only borrower of the loan rather than including your spouse. This can be problematic if you pass away before your spouse does, because the loan will become due when you die since you are the sole borrower.
6. ‘Sign here’
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.
How to protect yourself
“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, Taylor recommends. If your lender doesn’t offer reverse mortgages, at least it might 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,” advises 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 that you attend the closing and receive any payments personally.
If you think you’ve been a victim of a reverse mortgage scam, file a complaint with the Federal Trade Commission on its reporting website or by calling 1-877-FTC-HELP. You can also file complaints with your local FBI field office, your state Attorney General’s office or your state’s banking regulatory authority.