Reverse mortgage scams prey on elderly property owners who are in desperate need of supplemental income and have equity in their homes. Brokers target elderly homeowners because they are susceptible to high-pressure sales techniques.
If homeowners fall victim to reverse mortgage scams, they risk losing their homes, reducing the value of their probate estate, and increasing their debt.
What Is a Reverse Mortgage?
A reverse mortgage is reserved for homeowners aged 62 and older who have equity in their homes. Unlike a traditional mortgage that allows a buyer to borrow money to purchase a home, a reverse mortgage allows an owner to receive cash for the amount of equity they have in their home. Typically, reverse mortgages are offered to retirees because they no longer have employment-related income. The elderly homeowner can access a large amount of cash right away with a reverse mortgage.
A lender typically arranges a reverse mortgage. Furthermore, some reverse mortgages are underwritten by the Federal Housing Administration and a few scam organizations.
A reverse mortgage may seem attractive if you face unexpected expenses, such as medical bills since it allows you to receive cash up-front without making monthly payments. The equity in your home is your payment.
If you pass away, sell the home, or stop using the home as your primary residence, the balance is due immediately. Any remaining equity belongs to you.
Are There Different Types of Reverse Mortgages?
Yes, there are different types of reverse mortgages based on the source of the loan. Examples include:
- Single Purpose Reverse Mortgages: These types of reverse mortgages are typically offered by state and local government agencies. They are also known as property tax deferral loans or deferred payment loans. In these loans, the homeowner can access part of their equity, but not all, in order to pay for an expense approved by the lender. Property taxes and essential home repairs are the most common expenses approved for this type of reverse mortgage;
- Home Equity Conversion Mortgages: Known as “HECM,” these are federally insured mortgages typically distributed by the Department of Housing and Urban Development (“HUD”). Through HECM, senior citizens can convert the equity in their homes into cash based on the appraised value and the age of the borrower; and
- Proprietary Reverse Mortgages: Proprietary reverse mortgages are offered by banks, mortgage companies, and other private lenders. They also use the home equity of the homeowner, but there is no government involvement in the process. The lenders set their own rules, and the loans are not subject to government limits on proceeds.
The homeowner is not usually required to disclose their income or provide any medical data to qualify for a reverse mortgage, regardless of the type. The applicant may, however, be required to undergo some type of mortgage counseling before they are approved. A homeowner’s borrowing capacity is determined by his or her age, the equity and value of their house, and the available interest rate.
Eligibility for Reverse Mortgages
In addition to being at least 62 years old, you must live in the property for which you are seeking a reverse mortgage. Other requirements include:
- Own your home or only owe a small amount on your mortgage
- Having a source of income to pay various property expenses
- Pay all property taxes, homeowner’s insurance premiums, and utility bills
Reverse Mortgage Scams
Although the Federal Housing Administration advises seniors to seek counseling before signing reverse mortgage paperwork, many homeowners enter into reverse mortgage contracts blindly after being misled by scam artists. Scam artists often misrepresent the risks of reverse mortgages.
Common scams include:
- Lying about the Risks: Scam artists often state that you cannot lose your home in a reverse mortgage. It is, however, very easy to fall prey to foreclosure in a reverse mortgage if you fail to pay your real estate taxes.
- False Advertising: Scam artists will label the payouts as free simply because there are no monthly payments. The entire mortgage will become due. However, if you die, sell the house or default on one of the conditions, such as maintaining the homeowner’s insurance.
- Misrepresenting the Effects of the Reverse Mortgage on Your Estate: Your home is your investment. You want your family to inherit it when you pass away. A reverse mortgage, however, requires the full balance to be paid when the borrower passes away. Unless your heirs are able to pay off the balance, they will never have a legal claim to the house you worked so hard to buy.
- Sales Pressure: Scam artists only want your money. Whether a reverse mortgage is a good investment for your future is irrelevant to them. As a result, they will use high-pressure sales tactics to encourage you to take a loan you may not need. Furthermore, if you take out a reverse mortgage when you are still young, you may find that all of the cash disappears quickly. Then you will have no cash and no equity in your home.
What Are Things You Should Look Out For?
The scammers can always be quite clever in how they manipulate gullible people, so when considering a reverse mortgage, keep these things in mind:
- Shop Around: It is always best to get personal recommendations from people who have used a lender with whom they have had a successful experience and search out more than one possible lender;
- Counseling: An applicant for a reverse mortgage must go through a counseling session with a HUD-approved counselor, the average cost of which is around $125. HUD requires counseling because it is concerned that seniors considering reverse mortgages may enter into transactions without knowing the drawbacks. Counseling should also help a person determine whether a reverse mortgage is really the best option for them given their particular circumstances;
- False claims: There are legal disclosures that a lender must make to a person before they sign a loan. A legitimate lender explains the information that must be disclosed and why they are disclosing it;
- Aggressive sales tactics: If a person receives a random call from someone claiming to be in the business of selling reverse mortgages, this is always a red flag. But any lender can use aggressive sales tactics. This is a red flag. Let’s say a person needs to make repairs to their home, and their contractor suggests taking out a reverse mortgage to finance the repairs. The contractor suggests a lender who could provide the homeowner with a reverse mortgage. It is important to understand the motivation of the person recommending a reverse mortgage, even if the recommendation is completely legitimate. The homeowner will want to know if the contractor receives a kickback for recommending a particular reverse mortgage lender.
- Deceptive Advertising: Reverse mortgages are advertised on television. People may even receive marketing material in the mail about reverse mortgages. Advertisements often make false claims, such as that reverse mortgages are government-approved or offered, or fail to inform prospective borrowers about significant fees and disadvantages of reverse mortgages.
- A lender might tell a homeowner that they will never lose their home. The homeowner who wants to move into a retirement home and lease their home to a relative will find this great news, but it’s false. In order to qualify for a reverse mortgage, the homeowner must continue to live in the home. The homeowner can also lose the home if the title is transferred or if the homeowner fails to pay property taxes, insurance, and maintain the home.
- Free income: Some scammers may claim that a reverse mortgage is a great idea because it is a no-risk mortgage that offers a person free income. It is false to claim that reverse mortgages pose no risks at all. A reverse mortgage does not provide any income to the borrower. The debtor is borrowing against the equity in their home, and the reverse mortgage is a loan that they have to repay at some point, e.g., if any of the conditions of the loan are met.
Do I Need a Lawyer If I Have Been the Victim of a Reverse Mortgage Scam?
If you have been pressured to sign a reverse mortgage contract, a skilled mortgage attorney can review the contract and help you understand its terms. An attorney can also help you fight contract enforcement if you need it.