Are Reverse Mortgages Legit?

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I’ve been seeing a lot of ads about reverse mortgages lately. So I became interested in seeing if they were legitimate or not? Reverse mortgages are one of those financial planning tools that are very useful for a specific purpose, and for specific people, that has, unfortunately, been sold aggressively to others. Not all reverse mortgages are scams, but you have to understand what you are getting from reverse mortgage lenders when you sign up.

In other words, there is a lot more to a reverse mortgage than what you see on that television commercial or Facebook ad.

What Is a Reverse Mortgage?

Let’s start from the beginning so that we have a solid footing. What is a reverse mortgage?

The most common way to explain reverse mortgages is to say that the definition of a reverse mortgage is when a reverse mortgage lender gives you a lump sum of money for the equity in your home and then gets the home when you die. However, this is a little bit deceptive in that there is more to it than that. Let’s look a little deeper to see what is really going on.

First, let’s look at a regular mortgage, or a forward mortgage, if you will.

With a traditional mortgage, a bank gives you a lot of money in a lump sum (actually they give it to your title company who gives it to whoever you buy the house from) and you pay them back over time with regular payments. Thus, a reverse mortgage should be where you give the bank a lump sum and they pay you back over time with regular payments. However, this is NOT what a reverse mortgage is. That is an annuity, which is a very different thing.

In reality, a reverse mortgage is really more of a reverse life insurance policy.

In a regular life insurance policy, you make premium payments to an insurance company, and when you die, they pay out a lump sum to your beneficiaries. A reverse life insurance policy would be where a financial institution pays you a premium, and then when you die, you pay them a lump sum from your estate. This is much closer to how a reverse mortgage really works, but even that doesn’t fully describe it.

What Are Reverse Mortgages?

The best way to really understand what a reverse mortgage is, and how a reverse mortgage works, is to look at some scenarios.

For our reverse mortgage examples, we will assume a homeowner, age 72, with a house worth $300,000 that has a paid off mortgage. In other words, there are no current mortgages on the house; it is owned free and clear. In our example, the homeowner gets a $200,000 reverse mortgage. Let’s see what can happen.

Scenario #1: Moving

What happens if you have a reverse mortgage and want to move to a new home?

This is one of the big surprises that people don’t understand before they get a reverse mortgage. After signing up for a reverse mortgage, you cannot sell your home without the reverse mortgage lender’s approval. You may not be allowed to sell your home at all. If you can sell your home, you don’t just pay back the $200,000 reverse mortgage. You also have to pay interest, and penalties, and fees. It is NOT cheap.

So, one very big disadvantage of a reverse mortgage is that you probably can’t move or sell your house– ever.

If you are thinking of moving and renting it out, think again. Your reverse mortgage will clearly spell out who can live in the home. Usually, it is only you and direct family members. This can be a very big drawback, especially, if you need to move into a retirement home, or smaller house.

Scenario #2: Appreciation and Home Equity

Let’s say it has been a few years and your house is now worth $500,000 instead of $300,000. Good news, right? Maybe you would like to take out a home equity loan to do some things or help a grandchild go to college. After all, you have way more equity now than when you took out your reverse mortgage, right?

Unfortunately, that isn’t how it works. The reverse mortgage lenders have the rights to any future equity. It is one of the ways lenders make a profit on reverse mortgages. If your home is worth $100,000 more when you die, they make $100,000 in profit. You can’t take out any equity, it isn’t yours. All future increases in value belong to the reverse mortgage company.

Other Disadvantages of Reverse Mortgages

A partial list of reverse mortgage disadvantages:

Selling home restrictions
Moving restrictions
Restrictions on who can live in the home
Restrictions on what can be done to the home or property
No participation in higher home prices
No ability to further tap any equity

How Reverse Mortgages Work in Easy to Understand Terms

The best way to really understand how a reverse mortgage works is to change how you think about them.

What really happens with a reverse mortgage is that you sell your home for less than it is worth to a reverse mortgage lender. In exchange for the reduced price, the lender lets you live there rent-free, as a tenant (not an owner) until you die.

When you start thinking of it like this, a lot of the complexity disappears. Of course, you can’t sell your home, you already sold it. Of course, you can’t take out a home equity loan, you don’t own the house. Of course, you can’t have someone else move in, remodel, change too many things, or otherwise disturb the property; you have to ask the landlord first.

Legitimate Reverse Mortgages

The vast majority of reverse mortgages are legit. The part that seems like a scam is that they are aggressively sold to the wrong people. Since reverse mortgages are only available to older people, it can seem particularly predatory toward the elderly. Unfortunately, for a lot of people who get reverse mortgages, they don’t have very many options and may be too interested in the lump sum, tax-free payout, to truly listen to all of the negatives when weighing the pros and cons of a reverse mortgage.

If you read this and understand that doing this kind of mortgage severely limits your future options when it comes to your home, then you are ready to see who a reverse mortgage is right for.

Keep in mind that the amount of money you can get for a reverse mortgage depends upon two factors:

How much equity you have in your home
How old you are

Financial companies don’t do things without making a profit, and best reverse mortgage companies are no different. That means no one is going to give you 100% of your home equity, no matter how old you are. There would be no profit if you died too soon. The base amount is a percentage that depends upon, among other things, how likely they think the value of your home will rise, and how easy it will be to sell once you die.

That base percentage is modified by how old you are. This is where the insurance part of the transaction comes in. The lender can’t profit on the transaction until you die. The longer they have to wait, the more risk and the more it costs, because that money could have been earning interest or other return somewhere else. Therefore, all things being equal, the older you are, the more money you will get for your reverse mortgage.

Although you must be 62 years old to qualify for a reverse mortgage, at that age, you are only going to get a very small payout of your equity. After all, in that case, it is very likely that you’ll live 10, 20, or even 30 years before the lender can make a profit. That means they need to make a bigger profit when you finally do pass on.

Reverse mortgages really don’t make sense until you are at least 70 years old. At that point, you can expect a better payout from the lender. Even then, you need to consider what happens as if you live another 20 years. Do you really want to stay in that house (and do all the necessary maintenance) during that time?

For many people, there are better options. Be sure you explore all the options before choosing a reverse mortgage. In the end, it may be your best option, but make sure you understand all the pros and cons and that you know what other alternatives you have before making a life-long decision.

Don’t be suckered into buying a reverse mortgage
Advertisements make them sound tempting but reverse mortgages can put your retirement at risk

Reverse mortgages sound enticing: The advertisements you see on television, in print and online give the impression that these loans are a risk-free way to fill financial gaps in retirement. However, the ads don’t always tell the whole story.

A reverse mortgage is a special type of home equity loan sold to homeowners aged 62 and older. It takes part of the equity in your home and converts it into cash payments. The money you get is usually tax-free and generally won’t affect your Social Security or Medicare benefits. The loan doesn’t have to be repaid until you or your spouse sells the home, moves out, or dies. Also, these loans, usually called Home Equity Conversion Mortgages (HECMs), are federally insured. (What’s your experience with reverse mortgages? Share your thoughts by leaving a comment below.)

But while a reverse mortgage may increase your monthly income, it can also put your entire retirement security at risk. And, according to a report from the Consumer Financial Protection Bureau, many advertisements are incomplete or contain inaccurate information.

To learn about more ways to tap your home equity read, “Reverse Mortgages and Their Alternatives.”

The reverse mortgage market makes up approximately one percent of the traditional mortgage market, but this figure is likely to increase as the Baby Boom generation—those born from 1946 to 1964—retires. That’s because an increasing number of Americans are retiring without pensions and, according to the Employee Benefit Research Institute, nearly half of retired Baby Boomers will lack sufficient income to cover basic expenses and uninsured health care costs. Women, in particular, have a greater likelihood of outliving their assets due to lower savings and pensions.

This makes them all the more vulnerable to sales pitches for reverse mortgages from trusted celebrities such as Robert Wagner, Pat Boone, Alex Trebek, former Senator Fred Thompson and Henry Winkler, who played the lovable cut-up “Fonzie” on Happy Days.

Yet, the CFPB study found, many of these ads were characterized by ambiguity about the true nature of reverse mortgages and fine print that is both difficult to read and written in language that is difficult to comprehend. Many ads did not mention information about interest rate or repayment terms. “The incompleteness of reverse mortgage ads raises heightened concerns because reverse mortgages are complicated and often expensive,” the report states.

Here’s what you need to know to avoid being misled by reverse mortgage advertisements:

A reverse mortgage does not guarantee financial security for the rest of your life.
You don’t receive the full value of loan. The face amount will be slashed by higher-than-average closing costs, origination fees, upfront mortgage insurance, appraisal fees and servicing fees over the life of the mortgage. In addition, the interest rate you pay is generally higher than for a traditional mortgage.
Interest is added to the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time. And the interest is not tax-deductible until the loan is paid off.
You still have to pay property taxes, insurance, utilities, fuel, maintenance, and other expenses. If you don’t pay your property taxes, keep homeowner’s insurance or maintain your home in good condition, you can trigger a loan default and might lose your home to foreclosure.
Reverse mortgages can use up all the equity in your home, leaving fewer assets for you and your heirs. Borrowing too soon can leave you without resources later in life.
Generally, you don’t have to pay back the money as long as you remain in your home. But when you die, sell your home or move out, you, your spouse or your estate, i.e., your children, must repay the loan. Doing that might mean selling the home to have enough money to pay the accrued interest.

Reverse mortgages and their alternatives: Living off your home equity

Home equity represents about 70 percent of the total assets of middle-income retirees, not counting Social Security and pension benefits. Many people, even those who hope to leave their house to their children, often have no choice but to tap their home equity when facing financial or health crises.

One option for people in such situations is to take out a reverse mortgage, which lets them draw on their home equity while continuing to live at home. But the loans are costly and complex, and many consumer advocates say they should be viewed as a last resort. So you might want to evaluate all possible options before you face such a crisis.

“The decision to tap home equity needs to be made as part of an overall financial plan,” says Barbara Stucki, vice president for home-equity initiatives at the National Council on Aging in Washington, D.C. “You have to be mindful of the fact that home equity is finite, and that if you really run into problems you can lose your house.”

There’s no best way to draw on your home equity; all of the alternatives have their pluses and minuses. Here’s what’s important for you to know:

Reverse mortgages. The main attraction of these loans, which are available to homeowners ages 62 and older, is that they generally don’t have to be repaid until you die, move out of your house permanently, or sell it. The amount you can borrow depends on your age (the older you are, the greater the amount), current interest rates, and the value of your home. The lender gets the principal back with interest when you or your heirs sell the house. If it sells for more than the loan balance, your heirs keep the difference.

The Federal Housing Administration, which insures most reverse mortgages through its Home Equity Conversion Mortgage (HECM) program, protects lenders from losses if borrowers or their heirs can’t sell a house for more than its loan balance. After real-estate prices crashed in the late 2000s, the FHA increased the ongoing portion of the mortgage insurance premium that borrowers pay from 0.5 to 1.25 percent of the reverse-mortgage balance. That insurance, plus interest charges, loan origination and servicing fees, and closing costs make reverse mortgages expensive.

Lenders can foreclose if you fail to maintain your house, pay property taxes, or pay homeowners insurance premiums. Last fall, the agency told lenders they could start considering an applicant’s ability to make those payments before approving a loan. MetLife Bank, a major reverse-mortgage originator, is already doing so, and the Department of Housing and Urban Development is expected to start requiring lenders to do so within the next year.

Homeowners have several types of reverse mortgages to choose from. Fixed-rate reverse mortgages typically require borrowers to withdraw the full loan-limit amount at closing, and interest accrues immediately. With an adjustable-rate reverse mortgage, by contrast, you can draw on your equity only when needed, and interest accrues only on the funds you take. The proportion of fixed-rate reverse mortgages issued in fiscal 2010 soared to 69 percent, up from 11 percent the previous year.

If you need to borrow a relatively small amount of your home equity or if you don’t plan to stay in the house for very long, an HECM Saver loan, which the FHA introduced in 2010, is a better option. You pay an up-front mortgage-insurance premium of just 0.01 percent of the maximum amount you can borrow, compared with 2 percent for a standard HECM. On a $200,000 home, that means an up-front payment of only $20 vs. the standard $4,000. But loan limits are 10 to 18 percent lower, and interest rates have been 0.25 to 0.5 percent higher for Savers than standard HECMs, according to the AARP Public Policy Institute. Loan origination and other fees might also be higher.

So prepare to shop around if you’re considering a reverse mortgage. Before you call any lenders, you should talk with a counselor approved by the Department of Housing and Urban Development. Indeed, you must do so by law to qualify for a federally insured HECM. (To find a counselor in your area, go the HECM counselors website and click on “Consumer Resources.”) It also makes sense to consult a certified financial planner, a certified public accountant, or an elder-law attorney before you call lenders.

Home-equity loans or lines of credit. These loans are less expensive than reverse mortgages and might be appropriate if you need cash to make a major home repair, for example. Of course, you must have the means to make monthly payments or you won’t get a loan. Proceed cautiously if your income is fixed or your health is declining, because you might not be able to keep up with the loan payments. “You’re loading your house up with debt, and that can be risky,” says Charlie Farrell, an investment adviser with Northstar Investment Advisors in Denver. “You might lose your home if you can’t pay the loan.”

If you have a low income, find out if you qualify for city and county grants and low-cost home-improvement loans. For information about such loans and other reverse-mortgage alternatives for low-income seniors, go to the HUD website.

Downsizing. You can sell the old homestead, buy a more modest house or condominium that’s less costly to maintain, and invest the money that’s left. Or you can sell your house, invest the net proceeds, and rent a smaller one or an apartment. “If you get $300,000 for your house, you could pay $1,000 in rent for 300 months, or 25 years,” Farrell says. “If you earn 3 percent a year on your invested equity, it will last even longer—probably longer than you’re going to need it to last.”

How your family can help

If your children or other family members are in the right financial position, consider these options:

A sale-leaseback agreement. You sell your house to one or more of your children, and then rent it back using the cash you get from the sale. You might be able to exclude up to $250,000 in taxes from what you gain on the sale ($500,000 for married couples filing jointly). As landlords, your kids will get rental income and tax write-offs. Consult an accountant to make sure that the math works for your family and that the deal will pass muster with the Internal Revenue Service. You’ll have to prove that you’re conducting what’s called an arm’s length transaction. If you sell your house to your son for a fraction of its market value, for example, the IRS might contend that you gave him a gift and tried to dodge the gift tax.

A private reverse mortgage. You benefit because your children will charge you less than commercial lenders, your up-front costs will be lower, and there won’t be ongoing mortgage-insurance expenses. The interest rate you’ll pay, which the IRS sets each month, is lower than what commercial lenders charge. Plan to hire an accountant or attorney to help you structure the loan to satisfy the IRS and draw up a new deed and other paperwork.

Here is how it might work: Your child agrees to give you a monthly check and pay for any major home repairs. You agree to repay the loan principal and compounded interest, plus any money he spends on maintenance. Typically, your child will be paid back when he sells the house after your death.

How to Beware of Reverse Mortgage Scams

Reverse mortgages were created to help senior citizens. Unfortunately, this financial product has become a vehicle for a number of scams geared toward seniors. Though the opportunity for deception seems to have decreased over the years, there is still a significant risk of fraud, even if a senior is not actively looking for one of these loans.

The Basics of Reverse Mortgage Fraud

These scams generally take a few basic forms. The most obvious types of fraud involve the perpetrator blatantly misleading the senior who is taking out the loan in an attempt to steal from them. There are more subtle cases as well, such as where the perpetrator convinces the senior to take out a reverse mortgage loan that is unsuitable or not the best option available.

Schemes Designed to Steal from Seniors

According to a bulletin from the Federal Bureau of Investigation (FBI), the two most common scams to steal from seniors are equity theft and foreclosure rescue. In an equity theft scam, the perpetrator will purchase a home that is in foreclosure or distressed / abandoned. The home is then sold to a senior citizen, who takes out a reverse mortgage after occupying the property for 60 days. Once the transaction is completed, the perpetrator will steal the proceeds of the loan.

In a foreclosure rescue scam, the perpetrator will identify seniors who are at risk of losing their homes due to foreclosure. They will convince the senior to obtain a reverse mortgage to save the property but will then inform them that they don’t qualify. The senior will then be encouraged to take out a traditional mortgage instead, at which point the property and its equity will get transferred to the perpetrator.

The Loan is Unsuitable or Not the Best Option

Sometimes reverse mortgage fraud involves more subtle deception – the lender or other advisor is not necessarily lying to the senior citizen who’s considering a reverse mortgage but pushes the loan knowing that it’s either not the best option or is an unsuitable product. In these instances, the scammer uses high pressure sales techniques to push the reverse mortgage, urging the senior to act fast before carefully considering their options. These criminals have also been known to send direct mail that attempts to sell the reverse mortgage as something closely tied to the government by using confusing language and different government seals.

If you are dealing with a lender, the biggest risk that you face is that the loan is not suitable for your needs. In some cases, the loan is simply not right for you. In others, a reverse mortgage may fit your need but may not be the most affordable or appropriate financing option available. It is the reverse mortgage lender’s duty to perform due diligence and to disclose this information to you.

In other cases, the fraud occurs when the perpetrator attempts to sell other products that will be paid for by a reverse mortgage. Seniors will sometimes receive a pitch for home improvements services. After the salesperson concludes the presentation, they’ll insist that a reverse mortgage is the best option to pay for these improvements. Companies that sell financial products such as annuities and insurance will sometimes encourage people to use the proceeds of a reverse mortgage to pay for these products.

Consumer advisory: Don’t be misled by reverse mortgage advertising

You might see enticing images of youthful retirees on the golf course or enjoying other leisure activities in a reverse mortgage advertisement. A reverse mortgage is a special type of loan that allows homeowners 62 and older to borrow against the accrued equity in their homes. The loan must be paid back when the borrower dies, moves, or no longer lives in the home.

Ads for reverse mortgages are found on television, radio, in print, and on the internet, and many ads feature celebrity spokespeople discussing the benefits of reverse mortgages without mentioning risks. We looked closely at many ads and found incomplete and inaccurate statements used to describe the loans. In addition, most of the important loan requirements were often buried in fine print if they were even mentioned at all. These advertisements may leave older homeowners with the false impression that reverse mortgage loans are a risk-free solution to financial gaps in retirement.

In conducting our study, we met with older homeowners in Washington DC, Chicago, and Los Angeles to learn about their thoughts and impressions of reverse mortgage ads. After looking at a variety of ads, many homeowners we spoke to didn’t realize reverse mortgage loans need to be repaid. Instead, some thought they could access their equity interest-free, or that the federal government provided the money as a benefit to seniors. Homeowners told us that the most attractive messages in the ads were “you can live in your home as long as you want,” and that you “still own your home.” Many ads, however, didn’t mention that seniors could lose their homes if they don’t satisfy the loan requirements, such as paying property taxes or homeowners insurance.

Seniors said the ads made reverse mortgages look like a good way to travel and enjoy retirement while they were still young and active. Yet Americans are living longer, more active lives than ever before. Reverse mortgage borrowers can outlive their loan funds by borrowing without careful planning.

Reverse mortgage ads don’t always tell the whole story, so consider these facts when you see advertisements:

1. A reverse mortgage is a home loan, not a government benefit

Reverse mortgages have fees and compounding interest that must be repaid, just like other home loans. With most reverse mortgages, federal insurance guarantees that borrowers will receive their loan funds if their lender has financial difficulty or if their loan balance exceeds the value of their home. However, borrowers pay for this insurance and it’s not a government benefit.

2. You can lose your home with a reverse mortgage

When a reverse mortgage ad says you’ll retain ownership of your home, or that you can live there as long as you want to, don’t take these messages at face value. These statements are true only if you continue to meet all requirements of the reverse mortgage. If you fall behind on your property taxes or homeowners insurance, are absent from your home for longer than six months, or fail to satisfy other requirements, you can trigger a loan default. If you don’t take care of the default in time, the lender can foreclose on your home. Sometimes these requirements are listed in fine print, but not always. If you have a question about reverse mortgage requirements, contact a HUD-approved housing counselor near you.

3. Without a good plan, you could outlive your loan money

After seeing a reverse mortgage ad, you might think that a reverse mortgage guarantees your financial security no matter how long you live. Americans are living longer today than they were just a generation ago. Make sure you have a financial plan in place that accounts for a long life. That way if you need to tap your home equity, you won’t do it too early and risk running out of retirement resources later in life.

Reverse Mortgage Fraud is Often Committed by Someone You Know!

According to this article by the Wall Street Journal, the victims of reverse mortgage scams often know the perpetrator. The perpetrator could be a financial advisor or even a family member. Though the entire story is worth reading, we’ll focus in particular on the case of Larry Bekis from St. Paul, Minn. In 2006, Bekis arranged for a his 84-year-old mother to take out a reverse mortgage on her home. Once the transaction was completed, he stole more than $100,000 from the proceeds and stopped paying for his mother’s nursing home care.

Tips from the FBI

Homeowners cannot be forced out of their homes because of a reverse mortgage. However, they remain obligated to keep the property maintained, pay their property taxes, and pay for homeowners’ insurance.

The FBI put together a list of tips to help seniors avoid reverse mortgage fraud. Since these tips are so important, we’ve republished them verbatim below:

Do not respond to unsolicited advertisements.
Be suspicious of anyone claiming that you can own a home with no down payment.
Do not sign anything that you do not fully understand.
Do not accept payment from individuals for a home you did not purchase.
Seek out your own reverse mortgage counselor.

Also, remember that other people might not be able to spot these scams. Reverse mortgage scammers specifically target older people with disabilities. By reporting potential scams, you can help to protect them.

Finally, be aware that you do not need to hire a high-priced attorney if you suspect someone has defrauded you or your family. If you contact the authorities soon enough, they may be able to recover the money.

How to Report Fraud

Many seniors who have experienced reverse mortgage fraud do not report the crime to the authorities. Whether you are ashamed, fearful, or have another reason for hesitation, it’s important that you come forward and report the crime. The authorities may be able to help you recover your personal losses, and you may save other seniors from suffering the same fate. Here are a few helpful links for reporting fraud.

The Bottom Line

Avoiding scams and obtaining legitimate information on a reverse mortgage can make this loan product a valuable financial tool for older people and their families. Like any mortgage, you need to consult the appropriate professionals and do your homework before you sign on the dotted line. Otherwise, you risk being taken advantage of by financial predators.

Resources

financegourmet.com, “Reverse Mortgages Scam or Legitimate Financial Tool?” consumerreports.org, “Don’t be suckered into buying a reverse mortgage: Advertisements make them sound tempting but reverse mortgages can put your retirement at risk,” By Catherine Fredman; consumerreports.org, “Reverse mortgages and their alternatives: Living off your home equity;” reversemortgagealert.org, “How to Beware of Reverse Mortgage Scams,” By Aaron Crowe; consumerfinance.gov, “Consumer advisory: Don’t be misled by reverse mortgage advertising,” By Nora Doward Eisenhower; investopedia.com, “5 Reverse Mortgage Scams,” By Michele Lerner;

Addendum

5 Reverse Mortgage Scams

Staying vigilant against Internet scams and other fraud has become a natural part of life for many consumers, yet scams are successfully perpetrated every day. One reason is that individuals who intend to commit fraud have become more creative than ever, and they choose their targets with care.

One group of people that scammers like to target are older people, believing them to be less quick to catch on to a potentially harmful scheme than younger people. In recent years, as the number of homeowners over the age of 65 who opt for reverse mortgages rose, so has the prevalence of reverse mortgage scams.

KEY TAKEAWAYS

Scam artists often prey on older people with various mortgage and investment schemes.
A Home Equity Conversion Mortgage (HECM) is a tool available to people over the age of 62 and can be helpful in retirement.
It allows homeowners to borrow money, and the amount typically depends on the home’s value, the age of the homeowner, and the amount of equity in the home.
Many scams involve phony appraisals of home values or inaccurate loan documents.
Older people considering a reverse mortgage should begin at the HUD website and talk to a reverse mortgage counselor.

1. Foreclosure Scams

Perpetrators sometimes go after older people who are in danger of losing their homes to foreclosure. They artificially inflate the house’s value with the help of a dishonest appraiser and then obtain a reverse mortgage on the property. After the mortgage approval, the scammers have the person transfer the title to them, leaving the person without a home and without the funds from the reverse mortgage.https://6a09e890caf4fce4f09e91d1ce1183fd.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

Another way of defrauding older homeowners is to work with a fake financial institution that will inform the owners that they cannot qualify for a reverse mortgage but that they can have a different type of loan. During the closing, the title to the property will be transferred away from the homeowners.https://6a09e890caf4fce4f09e91d1ce1183fd.safeframe.googlesyndication.com/safeframe/1-0-37/html/container.html

2. Equity Theft Scams

Complicated equity theft schemes often involve several individuals who work together to buy a distressed property or a foreclosure. They then obtain an inflated appraisal and recruit an older person to repurchase the property and take out a reverse mortgage on it.

Usually, the settlement “attorney” for the reverse mortgage is also in on the scam. These individuals abscond with funds from the reverse mortgage at settlement, leaving the older person with little or no equity and no cash.

3. Free Homes

Scammers and con artists use advertising to recruit older people to live in a home to obtain a reverse mortgage on the property. The scammers keep the reverse mortgage proceeds, and the older person pays the property taxes and insurance on the home.

Generally, the reverse mortgage is obtained on a false, inflated appraised value. Once the older person passes away or move, the reverse mortgage lender is stuck with a loss due to the lack of real value in the home.

4. Document Fraud

Some con artists simply send letters to older people about their loan documents, such as a “Reconveyance Deed,” requesting money to provide them with copies of the deed. This document should be on file with the lender.

Other scam artists charge money to older people, sometimes thousands of dollars, for information about a reverse mortgage that is available free from the Department of Housing and Urban Development (HUD).¹

5. Investment Scams

Some scams are specifically geared to getting the target to “invest” in an annuity or real estate fund affiliated with reverse mortgages. The victims will lose the money they invested when the con artist, usually someone associated with a fraudulent reverse mortgage lender, walks away with the funds.

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