Reverse mortgages can help older adults supplement their income or pay medical bills. But, not all reverse mortgage opportunities are created equal: Discover how to spot — and avoid — common reverse mortgage scams.
A reverse mortgage is a unique type of loan for homeowners age 62 and older that allows them to borrow against the value of their home, using their home as collateral. For older adults with significant home equity, reverse mortgages can offer a solution for paying mounting medical bills and other unexpected senior care expenses.
Homeowners can receive a reverse mortgage loan in several ways:
- A lump sum.
- A line of credit.
- Term payments.
- Equal monthly payments plus a line of credit.
- Term payments plus a line of credit.
Reverse mortgages must be paid back when the borrower passes away or sells and moves out of the home they borrowed against. These mortgages feature many benefits, like flexibility and no monthly payments required toward the balance. But be aware if something sounds too good to be true, as there are many reverse mortgage scams.
Common reverse mortgage scams
These scams often target older homeowners. Here are some of the most common:
- House flipping scams. Realtors will help the homeowner apply for and receive a Home Equity Conversion Mortgage (HECM) to pay for a small property to flip — then they may divert the profit of the mortgage to themselves. To homeowners, it looks like they were getting the property through the Housing and Urban Development (HUD) program when the new home purchased and “fixed up” is in deep disrepair.
- Foreclosure scams. Some scammers find lists of older adult homeowners close to foreclosure and target them as special homeowners eligible for “relief using a reverse mortgage.” While a reverse mortgage can help pay off an existing mortgage, it doesn’t erase closing costs, other fees, property taxes, insurance premiums, or home maintenance expenses. If homeowners cannot keep up with the still-existing payments, they may face reverse mortgage foreclosure.
- Contractor scams. Unscrupulous contractors or other home care vendors may unsolicitedly approach older homeowners, mention an issue with the house needing an immediate fix and strong-arm them into agreeing. They suggest a reverse mortgage as a “free money” way to finance a home project. While this pays the provider, it’s not “free money,” nor is it in the homeowner’s best interest, as other home repair financing options exist.
- Equity theft scams. Appraisers, attorneys, and loan officers work together, inflating an appraisal on a home to make it seem like the homeowner has more equity than they do. The scammers convince the homeowner to get a reverse mortgage to cash in on their high equity. They handle all the documents, close the loan, and take the loan proceeds, leaving the borrower with little to no equity and cash after paying closing costs and other fees.
- Veteran-targeted scams. As of August 2020, the Consumer Finance Protection Bureau reported that the U.S. Department of Veterans Affairs (VA) does not offer “no repayment” reverse mortgage loans.
- Relative fraud. Some relatives — whether they have power of attorney over a homeowner’s estate or not — try to convince the homeowner to take out a reverse mortgage and take the loan proceeds for themselves.
How to spot a scam
With several reverse mortgage scams to look out for, it can be challenging to determine which options are legitimate and which are too good to be true. Some handy considerations and reverse mortgage red flags to watch out for include doing your due diligence, staying aware of false or deceptive advertising messages, sensing aggressive sales tactics, and staying wary of anything “free.”
Though everyone loves to hear “free,” it’s not a term synonymous with reverse mortgages. Reverse mortgages don’t offer “free money,” “no risk,” or “free income.” The equity of a house borrowed against drops as debt increases — and that debt must be repaid at some future point.
Older homeowners needing a reverse mortgage should always shop around before committing to a lender. Asking trusted friends, doing online research, and reading testimonials can give a comprehensive and informative picture of the lender. Dishonest lenders will insist you need them and that they are your only option — and that simply just isn’t true. In addition, applicants for reverse mortgages must go through a counseling session with a HUD-approved counselor — and if this step doesn’t happen, the program may be a scam.
With the dynamic rate of technological innovation and marketing messages constantly evolving, deceptive advertising remains an underhanded way for scammers to convince their targets to apply for a reverse mortgage. Analyze the claims advertisements make to ensure they are truthful and legal. Similarly, aggressive advertising and sales tactics can be a major red flag for a reverse mortgage scam. Pushy contractors, lenders, or other vendors attempting to pressure a homeowner into taking out a reverse mortgage may indicate a scam.
How to avoid a scam
Avoid reverse mortgage scams by keeping an eye out for the red flags mentioned above and considering the following dos and don’ts:
- DO submit a complaint. Most companies respond within two weeks. Provide documents and evidence to show how the lender mistreated the situation or how they communicated false claims.
- DO report fraud. Be prepared to provide your name and the details of the reverse mortgage scam.
- DO choose to work with a reputable lender. Check the business’s reputation through the Better Business Bureau.
- DON’T give out sensitive personal information. Only when you are 100% sure about the legitimacy of your lender should you give your personal financial information.
- DON’T rush into a reverse mortgage. HUD sets up a counseling meeting for a reason — this is a big decision that could affect or impact the future use of a home. Be confident that a reverse mortgage is the best solution to a situation before signing anything.
- DON’T respond to unsolicited advertisements. This includes contractors or vendors approaching you about potential repairs.