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The promise of borrowing money without having to make a monthly payment makes reverse mortgages attractive to elderly homeowners — and reverse mortgage scammers. If you’re 62 years or older and considering a reverse mortgage, make sure you know the warning signs of reverse mortgage scams.
7 reverse mortgage scams to watch for
Reverse mortgages are increasingly popular as a retirement planning tool for homeowners and give them flexible access to their home equity. However, as aging seniors become more socially isolated, scammers have more opportunities to target them with reverse mortgage scams.
Knowing the signs of these schemes can help you or a loved one avoid being taken advantage of by fraudsters.
1. Reverse mortgage investment scheme
HOW IT WORKS: A sales representative tries to persuade you to use your reverse mortgage for estate planning and invest the money into an insurance product or annuity promising a high return as part of an estate.
WHY IT’S BAD: The investments may be fraudulent or come with excessively high fees payable to the financial advisor. The advisor doesn’t explain that the returns may not offset the mortgage interest charges accruing each month on the reverse mortgage loan balance.
2. House-flipping
HOW IT WORKS: The scammer suggests using cash from a reverse mortgage to buy another property, fix it up and resell it quickly for a profit.
WHY IT’S BAD: The person selling this idea may guarantee the property will increase in value. The scheme may include real estate agents and mortgage loan officers colluding to generate commission income for themselves from the purchase and resale of the home — with no regard for whether the reverse mortgage borrower makes a profit.
3. Home improvement schemes
HOW IT WORKS: A person knocks on your door offering a free consultation for handyman services. The inspection reveals major repairs and the fraudster suggests using a reverse mortgage to pay for the repairs. The reverse mortgage loan officer may be involved in the scam to earn a sales commission on the reverse mortgage.
WHY IT’S BAD: The repair costs are often excessive and the handyman may record a lien on the property if the borrower refuses to pay. These scams assume the homeowner won’t contact local contractors to confirm the work needs to be done or research any other home improvement loan options.
4. Mortgage payment relief
HOW IT WORKS: Scammers target low-income seniors struggling to make their house payments or pay medical bills. They often lure victims with advertising messages like “stop foreclosure now” or “100% money-back guarantee” and may charge an upfront nonrefundable fee to speed up the approval process.
WHY IT’S BAD: The company may take the upfront money and disappear before providing the stated services, or offer a service that includes paying your bills off for you. You advance the funds to them along with the bill information, but the scammer pockets the funds and the bills are left unpaid.
5. High-pressure sales
HOW IT WORKS: A reverse mortgage loan officer may try to push you to use a “special” reverse mortgage loan program that’s not insured by the Federal Housing Administration (FHA) on the premise that the costs are cheaper and the loan is easier to get approved and they’ll get you your money faster.
WHY IT’S BAD: The loan officer may be pushing a proprietary reverse mortgage product that doesn’t offer the protection of the FHA’s home equity conversion mortgage (HECM) program. HECM loans protect seniors from this type of sales pressure by requiring a meeting with a certified and trained Housing and Urban Development (HUD) counselor.
6. Fraud by relatives
HOW IT WORKS: Relatives pressure elderly family members to take out a reverse mortgage and use the equity for their own needs, rather than the best interest of the senior homeowner. According to the CFPB, family members may even impersonate an elderly relative during the loan process.
WHY IT’S BAD: Family members may take advantage of physically or mentally disabled relatives to access wealth now rather than inheriting it. They may even convince the homeowner to sign a power of attorney so they have sole access to reverse mortgage loan funds.
7. Special military veteran reverse mortgages
HOW IT WORKS: A reverse mortgage lender claims they offer special terms for military veterans or implies the U.S. Department of Veterans Affairs (VA) backs reverse mortgages.
WHY IT’S BAD: The VA doesn’t offer or back any reverse mortgage programs. The advertisements are often designed to attract military families by falsely claiming their reverse mortgage products are somehow affiliated with the VA.
Reverse mortgage scam red flags
The Consumer Financial Protection Bureau (CFPB) takes legal action against lenders that use deceptive reverse mortgage advertising tactics. The following are examples of language that should be a red flag for you to steer clear of a company, along with the truth about the claim.
1. “You can stay in your home for the rest of your life.”
The truth behind the claim: You can stay in the home as long as:
- You can maintain it.
- You live in it as your primary residence.
- You pay ongoing expenses such as property taxes, homeowners insurance and homeowners association (HOA) fees.
2. “You can’t lose your home.”
The truth behind the claim: You can lose your home if:
- You stop living in it as your primary residence.
- You can’t pay ongoing expenses.
- Your home is not properly maintained.
3. “You’ll be able to pay off all your debts.”
The truth behind the claim: You’ll be able to pay off debt if you can tap enough equity in your home to cover the debt balances.
4. “You can’t be forced to leave.”
The truth behind the claim: You can be forced to leave if:
- The primary reverse mortgage borrower dies.
- The lender forecloses because of unpaid taxes, homeowners insurance or deferred maintenance.
5. “You won’t have any payments.”
The truth behind the claim: You won’t have a mortgage payment, but you will still be responsible for paying property taxes, homeowners insurance and any other ongoing property-related costs.
6. “You won’t have to pay any costs.”
The truth behind the claim:
- You may pay up to $6,000 in HECM lender fees.
- You’ll pay 2% for an upfront mortgage insurance premium (MIP) on a HECM and an annual MIP charge of 0.5% of your loan balance.
- You’ll pay $125 (or more) for a HUD counseling session.
- The costs are typically added to the loan balance which means you don’t pay them out of pocket.
7. “Our program is affiliated with the U.S. government.”
The truth behind the claim:
- The FHA HECM program is insured by the Federal Housing Administration, and lenders are approved to offer the program.
- It is illegal for a lender to claim they are “affiliated” with the U.S. government for reverse mortgages.
8. “If you’re 62 or older, you qualify.”
The truth behind the claim: If you’re 62 or older, you may qualify for a reverse mortgage if you:
- Have enough equity in your home to qualify.
- Plan to live in the home as your primary residence.
- Can prove you have the resources to pay ongoing property and maintenance costs.
Know your right to cancel a reverse mortgage
You have the right to cancel a reverse mortgage application even if you get through the entire reverse mortgage loan process. This is called your right of rescission and it typically gives you three days after you sign the paperwork to cancel the paperwork with written notice. The lender can’t force you to sign the closing paperwork if you don’t feel comfortable with any of the terms.
How to report a reverse mortgage scam
The Federal Trade Commission (FTC) advises you to file a complaint if you suspect reverse mortgage fraud. You should file such a complaint about reverse mortgages in writing with your state’s attorney general’s office, your state’s banking regulator or with the FTC itself. If you suspect the lender you are dealing with is legitimate but that a representative is acting inappropriately, you should also report that representative to the lender.
Even if you didn’t fall for a particular reverse mortgage scam, report it if you suspect one. Shutting down fraudulent operators will keep other homeowners from being victimized.
Related:
- What is a piggyback mortgage loan & how does it work?
- Can you lose your house with a reverse mortgage?
This article
originally appeared on LendingTree.com and was
syndicated by MediaFeed.org.
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9 reverse mortgage questions answered
Your golden years should be the time you finally get to sit back, relax and enjoy everything you worked for. However, as some people head into their retirement years, they discover that the money they saved isn’t enough for their wants or needs.
One way senior homeowners can supplement their income is through a reverse mortgage. A reverse mortgage allows you to tap into the equity you’ve built up on your home without having to pay back the funds with a monthly payment, as you would with a traditional home equity loan.
This has become a somewhat controversial income stream, but at its core it’s not necessarily nefarious as long as you know exactly what you are getting into you before you apply for one.
Indeed, there are multiple risks that come with a reverse mortgages: There are upfront closing costs to consider; the loan must be repaid if you pass away or move out of the home; it could make it more difficult to pass a home on to your heirs; and you’re reducing the equity you own in your home.
While the reverse mortgage may provide an additional source of income, you should make sure you understand each aspect of the loan before deciding whether this option will work for you.
Here are 9 commonly asked reverse mortgage questions and their answers:
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On a conventional mortgage, a borrower pays the bank for a loan used to purchase their property. The borrower then makes payments until they have fulfilled the terms of their loan, after which time they own the property. A reverse mortgage is exactly the opposite. The homeowner takes out a loan using their equity as collateral, and the lender issues payments directly to the borrower.
A reverse mortgage is not a home equity loan. The balance of a reverse mortgage is not due until after the homeowner passes away or sells the house. In essence, the bank is paying you for your house.
“The biggest difference is there are no payments required. You can pay as much or as little as you want towards the loan each month,” said Craig Clayson, a senior loan officer with Security National Mortgage Company in Cottonwood Heights, Utah. “There are no prepayment penalties.”
It is important to note that there are expenses associated with having a reverse mortgage, including mortgage insurance and a premium you may have to pay upfront. Some lenders may have additional fees, so make sure that you understand all of the terms of your loan.
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There are certain qualifications a borrower must meet before they are eligible to apply for a reverse mortgage:
- The borrower must be at least 62 years old and live in the home that they want to take a reverse mortgage on.
- They have to own the home, meaning that the mortgage is entirely paid off or has a balance low enough that it can be paid off with the loan.
- Anyone living in the home (e.g. spouse, children, siblings) may apply as a co-borrower if they are at least 62 as well. A spouse under the age of 62 may qualify as an eligible non-borrowing spouse.
- You must continue to pay taxes, insurance and other maintenance costs on the property.
- If you are applying for a Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, you’ll be required to meet with a financial counselor to discuss whether you qualify for this type of loan.
- You cannot be delinquent on any federal debt (like taxes).
In addition to personal requirements, to qualify for a traditional HECM reverse mortgage, the property that you want to take a reverse mortgage on must also meet certain requirements. The property must be either a single family home or a two-to-four unit home with at least one unit occupied by the owner. HUD-approved condominiums and FHA-approved manufactured homes may also qualify.
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Usually, reverse mortgages aren’t repaid until the borrower passes away, at which time a surviving spouse or their heirs will be tasked with covering the payment. However, if you (or your loved one) move out of the home or stop using it as a primary residence, you will have to begin paying the loan back. Your loan may also be called if you stop caring for the property or fail to make timely tax payments.
One option for repaying your reverse mortgage is to sell the home and use the proceeds from the sale to pay off your balance. Any remaining equity in the home is given to the homeowner or their beneficiaries.
For a home equity conversion mortgage, if the home sells for less than the remaining loan balance, you are only held responsible for the sales price of the home so long as it is equal to the home’s market value. Beneficiaries may opt to refinance the loan or pay off the balance with cash. Additionally, homeowners may opt to begin paying off the loan (without penalty) to avoid negative amortization.
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Yes. Even though you aren’t required to make monthly payments to a lender, you could default on the loan if you don’t keep up on your property taxes and HOA fees, or if you neglect your home. Additionally, if you move out of the home or sell it, you’ll have to repay the loan money. Failure to make those payments could also result in default, and, ultimately, the lender could choose to foreclose.
In 2016, the Consumer Financial Protection Bureau (CFPB) ordered several lenders to change their advertising and marketing language because they were allowing borrowers to believe that they could not lose their home if they had a reverse mortgage.
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Reverse mortgages are typically used to supplement retirement income. They come with upfront costs, multiple risks, and because you are tapping into your equity, that will begin to decline as well. You’ll have to weigh the costs with the potential benefit.
Terri Boam, an HECM counselor with AAA Fair Credit in Salt Lake City, said that there are several reasons borrowers choose a reverse mortgage. These reasons include the death of a spouse (which reduces their social security income), a medical emergency and eliminating house payments.
“In most cases, borrowers are having difficulty in making their current mortgage. The idea is that the house will still build equity (even though they’ve taken out a loan), so there will be enough money to pay off the loan if they have to sell,” Boam said.
Boam said that other buyers opt to use a reverse mortgage to purchase a property. The borrower would provide at least 50 percent of the purchase price and receive monthly payments from the reverse mortgage instead of making a mortgage payment.
To maximize the benefits, borrowers should consider whether they want to leave the home to their estate upon their passing, and if a loved one, like a spouse or other dependent, would be at risk of losing their home once the borrower has died.
Any surviving borrower or qualifying non-borrowing spouse must still reside in the home, maintain the property and make property tax payments. Otherwise, the lender can require the loan to be paid in full.
A reverse mortgage may be a useful way to make sure you have enough money to take care of your needs now. A reverse loan works best for homeowners who:
- Plan to spend at least the next several years in the home
- Are able to continue to care for the property
- Have enough funds to pay any property taxes and HOA fees
Reverse mortgages allow the homeowner to retain ownership of their home without making monthly payments. Some borrowers who still owe some money on their home but are struggling to make monthly payments may opt for a reverse mortgage to pay off the balance of their home loan. This can relieve some anxiety, as the borrowers won’t have to make any payments on the loan, although the heirs will be responsible for paying off the loan or selling the home.
A reverse mortgage isn’t for everyone, according to Boam. “There are a lot of upfront costs including an origination fee and two percent of the mortgage price, wrapped into the loan,” she said. “If the person is not able to stay at least five years, then they’ve incurred an expensive mortgage product for very little return on their investment.”
There are different borrowing options (including lump sum, monthly payments and lines of credit). Understanding how each of these work can allow you to maximize their benefits while reducing financial risk for your family.
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The balance of the loan is due on your reverse mortgage after you die. If you have an estate, your beneficiaries can pay off the balance due on the loan and keep the home, or the bank will take possession of the home as repayment.
If anyone is living in the home after you die, they may have to move out. If they are a co-borrower or a qualifying non-borrowing spouse, they may be able to stay in the home until they die or move away.
Further, anyone living in your home who is not a co-borrower or qualifying non-borrowing spouse may have to leave your home if you move out for a year or more (like moving to assisted living).
“If there are no heirs and no trust or will, then the home wouldn’t be paid off. The property would likely go back to HUD, if there are no beneficiaries to claim the property,” Clayson said.
If the surviving heir chooses to sell the home and the home sells for more than what is owed, the heir will receive any amount that exceeds the loan repayment.
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If you die before you pay off your reverse mortgage, your estate is responsible for covering the loan. The person controlling your estate can do this by selling the home, paying off the balance some other way, or refinancing the home and taking on the loan payments themselves.
If you have a co-borrower or a qualifying non-borrowing spouse living after you pass away, they may be able to continue to live in the home without paying the loan as long as they continue to meet the requirements set up in your reverse mortgage.
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Reverse loans aren’t free. While reverse mortgages can be beneficial to older homeowners, lenders have to make money somehow. One way they earn from a reverse loan is through fees. Fees you can expect on an HECM include a loan origination fee (capped at $6,000), a servicing fee (capped at $35 for adjustable rate loans and $30 for fixed rate), third party charges (appraisals, title searches, insurance, inspection, recording fees and credit checks) and your mortgage insurance premium.
Your lender may allow some of these expenses (like the mortgage insurance premium) to be rolled into the loan total.
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The most important thing a borrower can do is to make sure that they are educated about all of their options. Clients opting for a reverse mortgage may be required speak with a financial counselor to make sure that they understand the process.
“The biggest thing is making sure you understand what happens when you vacate the property or stop paying taxes and insurance,” Clayson said.
A reverse mortgage can be an extra source of income in your retirement years. It’s a big decision, so borrowers should take the necessary time to look at all of their options and speak with different lenders before moving forward. As a potential borrower, you should be aware that there are other alternatives to a reverse mortgage that may better suit your needs. Alternatives include:
- Reworking your budget or taking on a small side job to increase your income
- Selling your home for a smaller or less expensive living space
- Refinancing your current home loan
- Taking out home equity line of credit
Factor in every aspect of your decision (including your ability to make appropriate tax payments, and maintenance of your property) before relying on this type of loan.
This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.
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