FRAUD RESOURCE CENTER
For some older homeowners, a reverse mortgage can be a way to supplement retirement income, consolidate debts or cover expenses like health care. For scam artists, they can be a lucrative tool to fleece people in their 60s and up out of large sums of money, or even their homes.
A reverse mortgage is a type of loan that’s designed to give people access to the equity they’ve built up in their home — basically, the property’s current value minus any outstanding loans or liens — without having to sell it. The borrower gets what is, in effect, a tax-free advance on their equity, in the form of a line of credit, fixed monthly payments or a lump sum. For most reverse mortgages, you must use the proceeds to pay off your existing mortgage; the remainder of the loan comes due when the owner moves, sells the house or dies.
Available to homeowners age 62 and over, reverse mortgages are complicated, and they can be risky. Fraudsters take advantage of that complexity to draw older homeowners into bad or outright bogus deals, marketing reverse mortgages in ads and “investment seminars” as a cure-all for financial worries in your golden years, providing “free” income or a means to delay filing for Social Security.
The details of these cons can get arcane, but the bottom-line goal is simple: The scammers want to put the home equity you spent years building into their pockets.
It’s often a group effort, with unscrupulous mortgage brokers or financial advisers joining forces with corrupt appraisers, attorneys and loan officers. They’ll finagle an inflated appraisal of a home’s value, thus inflating the equity and the potential loan, and try to persuade the owner to take out a reverse mortgage. The team of crooks will handle the paperwork, close the loan and come up with a pretext to get the money or even take title to the house.
For example, the fraudsters might try to sell you on a supposedly can’t-miss investment or financial product. A scam contractor may fast-talk you into using a reverse mortgage to pay for home improvements. Some scammers target financially strapped homeowners, touting reverse mortgages as a way to avoid foreclosure or get out of debt. They may charge fees running into the thousands of dollars to provide information about reverse mortgages that’s actually available for free from the U.S. Department of Housing and Urban Development (HUD).
Other, more convoluted cons use reverse mortgages as a cover for property flipping. Scammers will buy a rundown house on the cheap and dummy up the paperwork to make it look more valuable. They’ll recruit an older person to buy it using a type of reverse mortgage that can be put toward a home purchase, or offer it as a “free home,” transferring the title for little or no money if the target agrees to get a reverse mortgage. When the deal is settled, the fraudsters walk off with the loan money, and the victims are left with the lemon house.
- A broker or lender uses high-pressure tactics to try to talk you into a reverse mortgage.
- They claim the loan is safe because it’s insured by the Federal Housing Administration (FHA). The FHA does insure some reverse mortgages, but that coverage doesn’t protect the borrower; it’s for the lender, in case of default.
- They don’t disclose the fees, conditions and risks that come with taking out a reverse mortgage, including the possible loss of the home, which serves as collateral.
- Do get information on reverse mortgages from reputable sources, such as HUD or the Federal Trade Commission.
- Do talk to a trusted financial adviser or attorney before you sign anything. If the reverse mortgage is a federally insured Home Equity Conversion Mortgage (HECM), as most are, you are required by law to meet with a government-approved counselor.
- Do be wary if someone selling home improvement services suggests taking out a reverse mortgage to pay for renovations or repairs.
- Do be suspicious of claims that a reverse mortgage will get you free income or a free home.
- Do know that you usually have the right to cancel a reverse mortgage within three days after closing.
- Don’t respond to unsolicited advertisements pushing reverse mortgages.
- Don’t sign any loan paperwork that you don’t completely understand.
- Don’t buy other financial products, services or investments in order to obtain a reverse mortgage.
- Don’t take out a reverse mortgage using just one spouse as the borrower. A reverse mortgage in one borrower’s name comes due when that person dies, and the surviving spouse could face collection proceedings and lose the home.
Published September 4, 2020
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Whether you have been personally affected by scams or fraud or are interested in learning more, the AARP Fraud Watch Network advocates on your behalf and equips you with the knowledge you need to feel more informed and confidently spot and avoid scams.
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