The FBI’s Internet Crimes Complaint Center reports that in 2020, people over the age of 60 lost about $1 billion due to fraud—$300 million more than the previous year. It’s proof that scammers are increasingly wily and successful. The list of schemes targeting older adults includes reverse mortgage scams. Because reverse mortgages are more complicated and counter-intuitive than traditional mortgages, they present an opportunity for unscrupulous lenders and others. Here’s how to protect yourself from a reverse mortgage scam.
What Is a Legitimate Reverse Mortgage?
A reverse mortgage is a loan that lets qualified homeowners ages 62 and older take cash from their home’s equity while still living there. Converting that equity into a lump sum, line of credit or monthly payments allow you to enjoy the financial benefits of your home’s equity without selling the property. Of course, you need to meet all loan obligations as outlined in your loan agreement.
How to Quickly Identify a Scam
In a nutshell, if a reverse mortgage offer sounds too good to be true, it probably is.
“Houses cost money, so promises of a free house are likely to be suspicious,” says Ann Martin, CreditDonkey’s director of operations.
Legitimate lenders won’t require a fee to get the process started or pressure you to take action. And, notes Carter Seuthe, CEO of Credit Summit, “Most damningly, if they explicitly tell you not to contact your current lender about this offer, [it may be] a scam.”
How to Protect Yourself
One of the best ways to protect yourself from reverse mortgage scams is to make sure any lender you work with appears on the Federal Housing Authority’s (FHA) approved lender list if you are shopping for an FHA loan.
If you’re interested in a reverse mortgage, start with a lender you’re working with already to see if they offer reverse mortgages. If they don’t, they should be able to refer you to a reputable option.
In addition, the Federal Bureau of Investigation ( FBI) offers the following tips for protecting yourself from scammers:
- Don’t respond to reverse mortgage advertisements. If you’d like to explore a reverse mortgage, look for an approved lender near you.
- Be suspicious of anyone claiming that you can own a home with no down payment.
- Don’t sign anything that you do not fully understand.
Jake Hill, CEO of personal finance site DebtHammer, also recommends testing the boundaries. “Say you need some time to think or that you want to check your current lender’s terms first. If they get upset about these things, they’re trying to scam you,” he says.
Be Alert to These Common Scams
The U.S. Department of Housing and Urban Development (HUD) warns of the following frequently occurring scams:
- Contractors present unusually high estimates for home repairs or remodeling and encourage the senior homeowner to pay for the cost with proceeds from a reverse mortgage. They often take the money and run without providing the services.
- Scammers will sometimes require a fee for reverse mortgage counseling. Borrowers traditionally pay for the counseling to the advisor but not to the lender or loan officer.
- Financial advisors try to convince seniors to use the lump sum option from a reverse mortgage to pay for an insurance policy or annuity that nets a high profit to the seller or for a “can’t miss” investment.
How to Report a Reverse Mortgage Scam
To report a scammer and help protect others from that individual or organization, contact:
- Your state’s attorney general
- The FBI’s electronic tip line or your local FBI office
- HUD’s Office of Inspector General hotline at 1-800-347-3735
A reverse mortgage might be just what you need, but only if you understand what’s involved and work with an approved and reputable lender. And it’s always a good decision to consult with an independent financial adviser before making a major financial decision.
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.