A reverse mortgage is a popular funding source for homeowners seeking retirement. While this can be a great strategy to keep up with the cost of living, scammers try to prey on innocent people who do not know as much about reverse mortgages. Understanding common reverse mortgage scams will help you avoid becoming a victim.
Is a Reverse Mortgage Safe?
A reverse mortgage on its own is safe. This financing is for homeowners who have built up equity in their primary residence over the years. You need at least 50% equity in your home to start taking out mortgage payments. You can arrange for the bank to pay you every month or receive a lump sum. Banks even restrict you to 60% of the loan’s total for the first year, so new borrowers do not quickly burn through all of their equity.
A reverse mortgage can be a great funding source during your retirement years, and if you use all of the equity in your home, you don’t have to pay the loan as long as you fulfill certain conditions. The loan will become due when the borrower dies, and the mortgage insurance on the loan addresses potential gaps between the loan value and the property’s equity value. Like any financing, reverse mortgages have pros and cons, but they are safe.
What is a Reverse Mortgage Scam?
Financial institutions will not scam you with a reverse mortgage. You will receive the promised lump sum payment or monthly payments depending on the arrangement. Reverse mortgage scams tend to happen when an entity encourages you to use those funds for a specific purpose that serves their best interests. Some scammers may encourage you to take out a reverse mortgage to afford their shoddy services. Scammers hope older homeowners will ignore the red flags and give them the money. You can only take out a reverse mortgage if you are 62 years or older.
Types of Reverse Mortgage Scams and How to Recognize Them
Scams come in many forms, but if you recognize the most popular reverse mortgage scams and their commonalities, it becomes easier to spot any scam. Here are the most common ones.
Contractor and Vendor Fraud
Some scammers target homeowners who could use some repairs. These shoddy service providers may suggest taking out a reverse mortgage if you cannot afford their costs. Anyone who recommends that you take out a reverse mortgage for their services is not acting in your best interest when a HELOC makes more sense. If a contractor or vendor is not serving your best interests with your finances, why assume they will suddenly work in your best interests when performing their services?
Flipping homes is a great way to make money. You can buy a property at a low price, make a few modifications, and sell the property at a higher price to get a return on your investment. The model is simple, but it’s not easy in practice.
Some scammers encourage retirees to use a reverse mortgage to make a down payment on a beat-down property. While this approach follows the house flipping model, scammers will look for distressed properties that require significant work. The scammer only cares about buying distressed property and pocketing some of the change. The homeowner then gets stuck with a beat-down property without enough funds to make the necessary repairs. Buyers in this situation burn through most of their reverse mortgage proceeds and then have to contend with another mortgage payment for the distressed property. Even if their reverse mortgage payment covered the entire purchase, the property still represents additional property taxes, homeowners insurance, and other costs.
Homeowners on the brink of foreclosure or in the middle of the process are usually desperate. Scammers enjoy preying on desperate individuals because it’s more difficult for these people to think clearly, and they yearn for a solution even if the details are fuzzy. For example, some scammers promise to use the money from your reverse mortgage to pay off your debts or catch up on the outstanding mortgage. Instead, these scammers proceed to run off with the money without paying the lender. As a result, the victim still owes their debts and has less equity in their home.
Equity Theft Scams
Equity theft scams involve multiple people. Scammers will trick you into believing you have more equity in your home than you think. Victims will proceed to request a reverse mortgage that exceeds their home’s equity position. These scammers have seemingly trustworthy titles. A loan officer, attorney, and appraiser need to work together for this scam to work so that it can look normal on the surface. These thieves proceed to take the entire proceeds and leave the victims without a penny.
Veterans get exclusive perks for several loans and other financial products. It’s natural for veterans to think their benefits stretch to reverse mortgages, but this is not the case. The VA does not offer reverse mortgage loans, and veterans don’t get any incentives with the traditional route. A scammer may try to convince a retired veteran that they have perks because of their prior service. These scammers may run with some or all of the reverse mortgage funds when it’s all said and done.
Downsizing Risks and Other Misrepresentations
Reverse mortgages can provide steady cash flow to retirees who paid into home equity over the years, but this financing option has some risks. It’s possible for the loan to become due in your life if you fall behind on property taxes and homeowners insurance. The bank can also ask you to pay the loan if you do not adequately maintain your home. People who minimize the risks and make other misrepresentations could be trying to scam you.
Fraud By Financial Planners or Relatives
Most scams happen close to home. It’s a sad truth and a reason to remain cautious. You can seek advice from financial planners and relatives, but do not let them take out loans in your name. You should periodically review your credit report to ensure nothing suspicious is happening behind the scenes.
Leaving Out the Spouse in the Mortgage
If someone advises you to leave your spouse off the loan, they may have an ulterior motive. If you die as the only borrower, the loan instantly becomes due. Your surviving spouse will have to pay the loan, and due to the lack of available funds, that can mean selling the home at a discount. The scammer or one of their buddies may swoop in as the ‘hero’ and buy the home at a discount so the spouse can pay the debt.
Misleading Advertising and/or Tactics
Some advertising messages around reverse mortgages may downplay the risks and present this financing option as a risk-free steady cash flow for retirees. A reverse mortgage can help retirees, but they should also understand the risk of running out of home equity and needing another way to afford their cost of living. A reverse mortgage can work out well if it outlives both spouses. However, if both spouses outlive the reverse mortgage and use it as their main income source, the last few years of life can be filled with incredible financial stress. If an advertiser or seller is not honest about the pros and cons or slants it in favor of the advantages, you should be careful.
Other Red Flags to Look Out for to Avoid Reverse Mortgage Scams
Scammers may talk fast and be as vague as possible when you ask them questions. If they do not have a website or any established online presence, it can be cause for additional concern. Scammers prefer to enter a victim’s life and disappear without a trace. If the scammer asks for payments through cash or a wire transfer, it can also be problematic. The scammer may also pretend to be friendly with you while presenting the reverse mortgage as a solution to your woes. You should also be skeptical if a scammer reaches out and encourages you to take out a reverse mortgage and let them use your funds to invest in an asset.
Tips to Avoid Reverse Mortgage Scams
You don’t want to be a victim of a reverse mortgage scam. Understanding the red flags help you know what to avoid, but these tips will provide additional protection:
- Get a copy of your credit report. This report shows you a list of loans and other items under your report. If you see anything suspicious, you can freeze the account, contact your bank, and take other steps to protect yourself.
- Don’t give someone else the money. The money should go to your bank account from an approved lender. Do not trust someone else to do everything for you and provide payments at the end.
- Only work with a trusted lender. Reach out directly to the lender instead of relying on the middleman. Every scammer is a middleman who pretends to be your friend. Call the lender’s direct number, email the support team on their website, or visit your local branch if you do banking with a brick-and-mortar institution.
Go with a Trusted Reverse Mortgage Lender
A reverse mortgage loan can help you navigate retirement. These loans have some risks, but they can be beneficial with the right plan. To avoid falling victim to a reverse mortgage scam, you should go with a trusted lender for your reverse mortgage.
AAG is the top retail reverse mortgage originator in the United States. The company has over 4,500 reviews on Trustpilot and over 12,000 reviews on Experience.com that demonstrate the lender’s commitment to providing the best solutions for their borrowers. In addition, you can visit AAG’s website to get a free, no-obligation info kit or chat with one of their home equity specialists.