A reverse mortgage is a loan that gives seniors access to the equity they have built up in their home (it is the property’s current value, less any outstanding loans or liens) without having to sell it. Most reverse mortgage are not scams. Lenders can be reputable and fair, and reverse mortgages can be appropriate if you know about the risks. With a reverse mortgage, the borrower gets in effect, a tax-free advance on their equity, as a line of credit, fixed monthly payments, or a lump sum. For many reverse mortgages, you must use the proceeds to pay off your existing mortgage. The remainder of the loan comes due when the owner moves, sells the house, or passes away.
As AARP’s recent article entitled “Reverse Mortgage Scams” explains, reverse mortgages are available to homeowners age 62 and over. Reverse mortgages are complicated, and they can be risky. Scammers try to take advantage of this complexity to entice older homeowners into fraudulent deals. They market reverse mortgages to seniors as “investment seminars” and as the solution for financial issues. These fraudsters also claim that they provide “free” income or a way to delay filing for Social Security.
A team of crooks may include unethical mortgage brokers or financial advisers, who work with corrupt appraisers, attorneys and loan officers. They present an inflated appraisal of a home’s value to the senior. This inflates the equity and the potential loan, then they try to get the owner to take out a reverse mortgage. The team will do the paperwork, close the loan and come up with an excuse to get the money or even take title to the house.
These fraudsters might try to sell you on a purported can’t-miss investment or financial product. Some scammers prey on financially strapped homeowners, saying that a reverse mortgage can help them avoid foreclosure or get out of debt. They will charge fees up to thousands of dollars to provide info about reverse mortgages that is actually available for free from the federal government.
Other convoluted cons use reverse mortgages as a way to conceal property flipping. These scammers will buy a rundown house and crate bogus documents to make the dump look more valuable. They’ll find a senior to purchase it using a type of reverse mortgage that can be put toward a home purchase, or offer it as a “free home,” in which they transfer the title for little or no money, if the target agrees to get a reverse mortgage. When the deal’s settled, the crooks take the loan money and the victims are left with the shack.
The best advice? If it sounds too good to be true, it probably isn’t. Talk to an elder lawyer if you aren’t sure.
Here are some warning signs. Watch out for a broker or lender who uses high-pressure tactics to try to talk you into a reverse mortgage. You should also avoid a salesperson who says the loan is safe because it is insured by the Federal Housing Administration (the FHA does insure some reverse mortgages, but that coverage does not protect the borrower only the lender in a default). It is also important to be beware, if they don’t disclose the fees, conditions and risks that are associated with a reverse mortgage, including the possible loss of your home, which serves as collateral.
Reference: AARP (December 2020) “Reverse Mortgage Scams”