What Are Reverse Mortgage Scams?
Reverse mortgages can be useful for senior homeowners who have significant equity in their home and want to convert it into additional income. However, sometimes bad actors target seniors with misleading statements about how a reverse mortgage works. Before taking out this type of loan, here’s what you need to know, including some of the more common reverse mortgage scams to avoid.
How reverse mortgages work
Unlike a mortgage where you take out a loan and pay it off gradually, a reverse mortgage – as the name suggests – works the other way around. Your mortgage lender pays you based on a percentage of your home’s value, either as a lump sum, monthly payments, or a line of credit (or a combination of these options). Instead of paying off a loan, your debt grows and you don’t pay it off until you sell, leave your home, or die.
The most widely available reverse mortgage loan is 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 years of age or older, have significant home equity and live in their home. The maximum loan amount for an HECM in 2021 is $ 822,375.
There are also proprietary reverse mortgages from various lenders, which might offer higher amounts, but the fees could also be significantly higher.
Common reverse mortgage scams
Since reverse mortgages can be a source of easy money, scammers can encourage seniors to apply by making misleading statements or committing outright fraud. Some locations include:
1. “You can delay social security”
A fraudster can ask a homeowner to take out a reverse mortgage at age 62 to close an income gap while delaying Social Security benefits until age 70. The Consumer Financial Protection Bureau has found that the costs of a reverse mortgage exceed the cumulative increase in security that homeowners would receive by delaying benefits. Additionally, borrowers who use this strategy may later find that they have limited options for moving to a new location.
2. “You can buy a house without a down payment”
In this diagram, crooks – often with the help of straw buyers – buy distressed or abandoned property, then recruit older people to “buy” the house at a low price by transferring the deed to them without an exchange of money. money. The seniors move into the house and the crooks help them get HECMs with lump sum payments based on an inflated assessment. The perpetrators then find a way to escape with the money at the fence.
3. “You can get free income”
Some advertisers claim that you can get “free income” with a reverse mortgage. In reality, you receive loan repayments, not income, which is why the money you receive is not taxed. Ads that take this approach may not disclose the fees you will pay either and the fact that if you don’t pay home insurance or property taxes or maintain the property, you could lose your home.
4. “You can trust us”
Some reverse mortgage lenders hire famous spokespersons to give their ads credibility. While the product the spokesperson touted may be legit – 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 are older than your spouse, avoid being referred to the only borrower on the loan rather than including your spouse. This can be problematic if you die before your spouse, as the loan will become due on your death since you are the only borrower.
6. “Sign here”
Some crooks may ask you to sign documents that contain empty fields. Never sign documents with blanks, even if the other party claims they will fill them out later.
7. “You can make improvements to your home”
In this scam, a contractor or home improvement professional offers a reverse mortgage as a method of payment for work that they claim your home needs. While a reverse mortgage can help you find the money to make improvements to your home, it might not be the best way to go – especially because you might qualify for a margin instead. Home equity loan (HELOC) or home equity loan, which can be cheaper and risky.
8. “You can invest in this money generator”
In this scenario, a scammer is trying to get you to use the money from a reverse mortgage for a “money-making opportunity,” such as an annuity, life insurance policy, or stocks. Buying these products is usually not the smartest decision, especially if you need the funds for other purposes, like healthcare costs. Remember, you never have to buy a financial product or invest in anything to qualify for a reverse mortgage.
9. “You will not lose your house”
To get you into a reverse mortgage, scammers might use scary – even threatening – language to make it look like you need the loan in order to avoid foreclosure. No matter how persuasive they are or how urgent they seem, know that you always have other options.
Red flags of reverse mortgages to watch out for
Here are some signs of a potential reverse mortgage scam to watch out for:
- The scammer sends you an unsolicited offer.
- The scammer says he is the only lender or seller you need to talk to.
- The scammer says that a reverse mortgage is the solution to all of your financial problems.
- The scammer is trying to sell you a financial product.
- The crook is arrogant.
- The scammer is trying to send you payments for a house you didn’t buy.
How to protect yourself
Before taking out a reverse mortgage, talk to a housing counselor certified by the US Department of Housing and Urban Development (HUD). Look for a reputable lender and also check complaints with the Better Business Bureau.
“A legitimate reverse mortgage or home equity conversion mortgage is insured by the Federal Housing Administration, so borrowers should make sure this is the type of loan they are considering,” Taylor advises, co-founder and CEO of Mphasis Digital. Risk.
If you’re interested in a reverse mortgage, check with your current lender or a trusted financial advisor first, Taylor recommends. If your lender doesn’t offer reverse mortgages, they can at least point you to a reputable lender who does.
The same is true if you are having financial difficulties and are looking for a solution.
“If you’re having financial difficulty, contact your mortgage lender directly,” says Scott Sheldon, branch manager at New American Funding in Santa Rosa, California.
If you’ve found a reverse mortgage, done your research, and sought expert advice, it’s important to make sure you have enough income to cover your property taxes and home insurance each year as well, as the failure to do so is the biggest problem. cause of seizures.
Finally, be sure to attend the closing and receive payments personally.
If you think you’ve been the 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 office, your state attorney general’s office, or your state’s banking regulatory authority.