Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
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.
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.
- What is a piggyback mortgage loan & how does it work?
- Can you lose your house with a reverse mortgage?
More from MediaFeed:
9 reverse mortgage questions answered
Featured Image Credit: designer491 / istockphoto.