Reverse mortgages are often touted as a terrific way for elderly homeowners to supplement their income. Unfortunately, many senior citizens fall victim to scammers, who convince them to take out a reverse mortgage they don’t understand. And most of the time, the loan isn’t in the borrower’s best interest. For one thing, reverse mortgages are expensive. Also, borrowers often end up in foreclosure due to relatively minor mortgage violations. These loans are designed so that the lender eventually ends up with the home. Even if you do everything you’re supposed to under a reverse mortgage contract, you probably won’t have money or equity left when the loan comes due and you’ll probably lose the home to foreclosure.
Reverse Mortgage Overview
In a regular mortgage, the borrower gets a lump sum of money from the lender upfront, and makes monthly payments to pay the money back, along with interest. On the other hand, in a reverse mortgage, the homeowner typically receives periodic payments from the lender, which become the loan. The loan gets bigger every time the lender sends a payment, until the maximum loan amount is reached. The loan comes due when a triggering event happens. (This is explained in more detail below.)
It’s not uncommon for scammer lenders and brokers to trick seniors into taking out reverse mortgages. Here are some scams to watch out for.
Misleading Claims That You Won’t Lose the House
To convince elderly homeowners to get a reverse mortgage, lenders and brokers sometimes tell potential borrowers that they will never lose the home with this kind of loan. But this isn’t true. Reverse mortgages are complicated and borrowers commonly end up losing the home to foreclosure.
A reverse mortgage comes due when one of the following triggering events happens:
- The home is no longer the borrower’s principal place of residence. (If you still own the home, but live somewhere else most of the time, the home is no longer considered your principal residence.)
- The borrower moves out because of a physical or mental illness, and is gone for more than 12 consecutive months.
- The borrower sells the home.
- The borrower transfers the home’s title (ownership) to someone else.
- The borrower passes away, or
- The borrower doesn’t meet the requirements of the mortgage, such the obligation to pay property taxes, maintain hazard insurance, and keep the property in a reasonable condition.
After one of these events occurs, the loan must be paid off or the lender will foreclose. Many seniors have gone through a foreclosure because of mortgage violations like failing to give the lender proof of occupancy (when the lender, for some reason, thinks the borrower is no longer living in the home), neglecting to pay insurance premiums (which lenders are habitually mistaken about), or letting the home fall into disrepair (based on the lender’s assessment of the home).
Delaying Social Security Benefits and Taking Out a Reverse Mortgage
While not exactly a scam, homeowners should extremely cautious about getting a reverse mortgage to delay taking Social Security benefits.
A reverse mortgage broker or lender might tell you to get a reverse mortgage to make up the gap in income while you delay getting Social Security benefits until you’re older. Because you delay getting the Social Security benefits, you'll get a permanent increase in the monthly benefit when you start receiving benefits at an older age.
However, according to the Consumer Financial Protection Bureau (CFPB), the costs and risks of taking out a reverse mortgage are often higher than the cumulative increase in Social Security lifetime benefits that you'd receive by delaying Social Security. To read about the risks associated with taking out a reverse mortgage to delay collecting Social Security, read the CFPB’s August 2017 report.
Misleading Claims About FHA Insurance
Almost all reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are federally insured through the Federal Housing Administration (FHA). Lenders and brokers who sell reverse mortgages sometimes assure potential borrowers in their sales pitch that the loan is federally insured. The broker then implies or even states that this insurance protects the borrower and that the government has therefore endorsed the sale of reverse mortgages. But that’s not the truth. This insurance program is not set up to help the homeowner—it’s to benefit the lender. The insurance kicks in if you default on your loan (you breach the mortgage agreement) and your house isn't worth enough to pay back the lender in full through a foreclosure sale. In those cases, the FHA will compensate the lender for the loss.
Deceitful advertising is another way that lenders and brokers sometimes convince seniors that taking out a reverse mortgage is a good idea. For example, some advertisements for reverse mortgages say that you get “tax-free money.” But of course reverse mortgage proceeds are not taxed—a reverse mortgage is a loan, not income. Sadly, the siren sound of “tax free” may be enough to sway a reluctant borrower.
Reverse mortgage advertisements also regularly mention that the loan will not affect your Social Security or Medicare benefits, which is true. However, these advertisements usually fail to mention that a reverse mortgage could affect your eligibility for Medicaid. While reverse mortgages are not considered income, under the Medicaid program you can’t have more than a certain amount of money each month. If you receive reverse mortgage funds on a regular basis, you might not qualify for Medicaid.
Scare Tactics and High-Pressure Sales Tactics
Reverse mortgage lenders and brokers sometimes use scare tactics and aggressive, high-pressure sales pitches to push vulnerable senior citizens into loans. For example, the broker might tell you about a “special rate” that is about to expire, or try to scare you by saying that the government is going to cut Social Security benefits. Often, the lender or broker says you need to act immediately or you’ll lose this great opportunity. However, none of that is true. There’s no need to rush into a reverse mortgage.
Reverse mortgage lenders have historically used celebrities like Tom Selleck, Robert Wagner, James Garner, Henry Winkler, and Fred Thompson in their commercials. While this isn’t necessarily a scam, it is calculated. The lender’s goal is to make you feel confident about the product. Because you trust the spokesperson, you might feel like you don’t need to learn the details about the loan. It’s in the lender’s best interest for you to stay uninformed. Once you understand all the requirements and consequences of a reverse mortgage, you’ll probably think twice before getting one.
Don’t forget that it costs a lot to hire a celebrity for an advertising campaign. The lender has to make this money back somehow and it will probably be in the form of high fees on its reverse mortgages.
Tips to Avoid Becoming a Victim of a Scam
Here are a few tips to avoid becoming the victim of a scam:
- Educate yourself. If you’re thinking about getting a reverse mortgage, learn all you can before you talk to a lender or broker. Learn how a reverse mortgage works and about borrower obligations under the agreement. You can go online and watch videos to learn more—though stay away from lenders’ promotional videos and lender-based websites. They won’t give you the full story. A good place to start is the Consumer Financial Protection Bureau, an agency of the U.S. government. Take time to learn about the upsides and downsides of reverse mortgages, and don’t sign any paperwork unless you fully understand how this type of loan works.
- Talk to a financial planner or attorney. Federal law requires that borrowers talk to a loan counselor before taking out a reverse mortgage, but not all counselors effectively explain the ins and outs of reverse mortgages. Because reverse mortgages are very complex and have serious consequences, consider talking to an attorney or financial advisor too.
- Deal with reputable lenders. If you’re still thinking about getting a reverse mortgage even after learning about all the downsides (like confusing terms, high costs, and the likelihood of an eventual foreclosure), deal with reputable lenders. Be sure to talk to more than one lender so you can compare costs and terms. To find reputable lenders, start with the HUD lender search on the HUD website rather than doing a basic online search. Then check the lender’s rating with the Better Business Bureau and make sure the lender is licensed. You can usually check the lender’s license status on your state’s official website.
Where to Report Scams
If you suspect that a lender or broker is involved in a reverse mortgage scam, you can file a complaint with the Consumer Financial Protection Bureau, the Federal Trade Commission, or your state’s Attorney General's office.