[Last updated March 6, 2024]
Reverse mortgages can help older adults supplement their income or pay for senior care expenses while aging in place. This type of loan can be a great resource for senior homeowners to free up much-needed capital. However, it’s important to be aware of reverse mortgage scams. Here’s what you need to know about fraudulent practices that involve reverse mortgages. With this information, you can move confidently through the reverse mortgage lender search and make the best decision for your situation.
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.
- • Monthly payments (for as long as they live in the home).
- • Term payments (equal monthly payments for a set period).
- • An annuity.
- • 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. Reverse 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 many reverse mortgage scams exist.
Common reverse mortgage scams
Reverse mortgage scams are prevalent, and there are several versions of this type of mortgage fraud. These scams often target older homeowners who may be looking for additional income in their retirement years. Here are some of the most common ones:
House flipping scams
A house flipping scam is a type of real estate investment scheme. A scammer convinces a homeowner to purchase and renovate another home, positing it as an investment opportunity to renovate and sell for a quick profit or to use as a rental property. In reality, the home is in deep disrepair even though it may have had minor improvements to make it look like a good investment. By the time the homeowner notices, the bad deal is done, and the scammers have made their profit, whether they are consultants, real estate agents, mortgage lenders, or contractors.
A common tactic is to have the homeowner get a home equity conversion mortgage (HECM) on their current home to purchase and pay for renovations on the second house. An HECM is a Federal Housing Administration-insured loan and one of the most common types of reverse mortgages. Since the loan is backed by the FHA, the person is more likely to be trusting of the situation.
Foreclosure scams
Some scammers target older adult homeowners at risk of foreclosure since people in this situation may be desperate for help and not thinking clearly or doing due diligence. The scammers say the homeowners are eligible for foreclosure relief and can stop foreclosure using a reverse mortgage. They convince the homeowner to get a reverse mortgage to pay off their existing mortgage and therefore avoid foreclosure, but they charge high fees or closing costs or may steal the funds from the reverse mortgage altogether.
Scammers say that the reverse mortgage is free money, but it isn’t. The homeowner must still pay closing costs and other fees. Scammers will also say that the homeowner cannot lose their home if they pay off the mortgage using a reverse mortgage, but again, this isn’t true. Even if the homeowner can use funds from the reverse mortgage to help pay off an existing mortgage, they still have financial obligations on their home and are at risk of foreclosure. The homeowner is responsible for paying property taxes, insurance premiums, and home maintenance expenses. Homeowners who cannot keep up with the still-existing payments face reverse mortgage foreclosure. Those facing foreclosure should contact their mortgage lender, who may be able to offer modifications to the loan terms or repayment schedule.
Contractor scams
In this type of scam, unscrupulous contractors or other home improvement vendors may unsolicitedly approach older homeowners, mention an issue with their house needing an immediate fix, and convince them to repair or remodel. They may suggest using a reverse mortgage as “free money” to finance the home project. Meanwhile, the issue likely doesn’t exist. The scammer may be unlicensed and inflate the cost of the project or may perform unnecessary, shoddy, or even damaging work to the home, pocketing payment from the reverse mortgage for their work.
Equity theft scams
In equity theft scams, a team of scam-artist 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 steal the loan proceeds, leaving the borrower with little to no equity or cash after paying closing costs and other fees.
Veteran-targeted scams
Some scammers offer reverse mortgages or promotions specifically for Veterans or say that their reverse mortgage product is backed by the U.S. Department of Veterans Affairs (VA). These reverse mortgages are most likely scams or are, at the very least, being advertised by dishonest lenders because as of the time of this publishing, there are no reverse mortgages or reverse mortgage promotions designed specifically for Veterans, and the VA does not offer reverse mortgage loans.
Relative fraud
In this type of reverse mortgage fraud, relatives convince the homeowner to take out a reverse mortgage they do not need and steal the loan proceeds for themselves. In some cases, the relative has power of attorney over the homeowner’s estate and can control their finances, using the money however they choose. Other relatives may simply convince the homeowner to give them the money received from the reverse mortgage.
How to spot a reverse mortgage 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 being wary of anything “free” or too good to be true.
Though everyone loves to hear “free,” it’s not a term you can associate 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 point in the future.
Dishonest lenders will insist you need them and that they are your only option — and that simply isn’t true. In addition, applicants for reverse mortgages must go through a counseling session with a HUD-approved counselor; if this step doesn’t happen, the program may be a scam.
With constantly evolving technological innovation and marketing messages, 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. 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 reverse mortgage scam
Avoid reverse mortgage scams by keeping an eye out for the red flags mentioned above and considering the following:
- • Do your research to learn more about reverse mortgages. 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.
- • Contact a HUD-approved reverse mortgage counselor for free to learn further information.
- • Choose to work with a reputable lender. Check the business’s reputation through the Better Business Bureau.
- • Choose a reputable real estate agent.
- • 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 reverse mortgage counseling meeting for a reason — this is a big decision that could have major consequences. Be confident that a reverse mortgage is the best solution for your situation before signing anything.
- • Don’t respond to unsolicited advertisements, including those from contractors or vendors approaching you about potential repairs or mentioning special Veteran reverse mortgages.
- • If you are in danger of foreclosure, speak with your lender to see if you can work together to modify the loan terms or repayment schedule. Do not respond to unsolicited calls or advertisements about foreclosure relief.
How to report a reverse mortgage scam
- • Report the fraud to the Federal Trade Commission. Be prepared to provide your name and the details of the reverse mortgage scam. You can report the scam at HUD’s fraud reporting link if the reverse mortgage was an FHA-backed loan.
- • If you suspect reverse mortgage fraud, submit a complaint about the company through the Consumer Financial Protection Bureau. Most companies respond to the complaint within two weeks. Provide documents and evidence to show how the lender mistreated the situation or how they communicated false claims.
Getting a reverse mortgage can be an excellent choice for a senior homeowner who wants to maximize their options for funding certain expenses. Knowing how to spot a reverse mortgage scam will help you make sound decisions and avoid the emotional and financial hardship that comes with falling victim to fraud.
