Reverse mortgages are designed to allow older homeowners to convert the equity in their homes into income to supplement their social security and other sources of income. However, there are some serious risks associated with reverse mortgages, including reverse mortgage scams. Read on to learn more about the risks and scams associated with this type of loan.
How Reverse Mortgages Work
Reverse mortgages are only available for homeowners who are 62 years of age or older and:
- occupy the property as a principal residence, and
- own the home outright or have significant equity in the home.
The most widely available reverse mortgage is the FHA's Home Equity Conversion Mortgage (HECM).
A reverse mortgage is different from a traditional mortgage in that it does not require the borrower to make monthly payments to the lender to repay the loan. Instead, loan proceeds are paid out to the borrower as a:
- monthly payment
- line of credit, or
- a lump sum. (You can also get a combination of monthly installments and a line of credit)
Generally, the loan doesn’t have to be repaid until the homeowner moves out, sells the house, or dies.
However, a reverse mortgage is not appropriate for all senior citizens. They can be expensive and the mortgage terms are complicated. Additionally, unscrupulous mortgage brokers sometimes try to trick seniors into taking out a reverse mortgage by making misleading claims or perpetuating scams.
For more information about reverse mortgages, see Reverse Mortgages for Retirees and Seniors.
Some Reverse Mortgage Scams and Risks
Here are some scams to watch out for.
High Pressure Sales
Mortgage brokers sometimes target financially vulnerable senior citizens and pressure them to take out a reverse mortgage. Seniors may face the same sort of lending practices that were prevalent in the subprime mortgage boom, such as an aggressive sales pitch pushing them into a loan they don’t need.
Some advertisements for reverse mortgages state that you get “free money.” However, the advertising fails to disclose the fees, conditions, or risks associated with loan. Often, seniors do not fully understand the terms of reverse mortgages and deceptive mailings only make this problem worse.
Misrepresenting the Risk of Losing the Home
Some brokers incorrectly state that you will never lose your home if you take out a reverse mortgage. However, this is not true. A reverse mortgage becomes due and payable (and subject to foreclosure) when, for example, one of the following circumstances occurs:
- the property is sold or title to the property is transferred
- the borrower no longer uses the home as a principal residence (or the borrower moves out for more than 12 months due to physical or mental illness), or
- the borrower fails to meet the obligations of the mortgage, such as paying property taxes, maintaining hazard insurance, or keeping the property in good condition.
This means a home can be foreclosed for something as minor as unpaid insurance premiums. (To learn more about when you can lose your home because of a reverse mortgage, see Foreclosure of Reverse Mortgages.)
Leaving a Spouse Off the Reverse Mortgage
Some brokers have encouraged homeowners to name the older spouse as the sole borrower on the reverse mortgage loan. This is because the amount you can borrow is based on the current interest rate, your home equity, and age.
Historically, the problem with this is that the surviving spouse can be at risk of losing the home when the older spouse passes away. This is because the loan becomes due when the last borrower dies. If the older spouse was the sole borrower on the reverse mortgage, the loan was considered due and payable when he or she died. Fortunately, if you take out a FHA-backed reverse mortgage after August 4, 2014, you'll be protected if your spouse passes away, but you are not named as a co-borrower on the reverse mortgage -- so long as you meet certain criteria.
For HECMs taken out prior to August 4, 2014, the lender can elect to assign the reverse mortgage to HUD (and the loan repayment will be deferred) when the older borrowing spouse dies. The non-borrowing spouse can then remain in the home. However, the non-borrowing spouse must meet certain eligibility criteria and the lender could choose to call the loan due and payable (and pursue foreclosure) instead. To avoid a foreclosure, the non-borrowing spouse would then have to pay off the loan, sell the home, or deed it to the lender. (Learn more in Nolo’s article New Rule – Spouses Not Named on Reverse Mortgages Are Protected From Foreclosure.)
Taking Out a Reverse Mortgage Too Early
If you take out a reverse mortgage lump sum when you are in your 60s, you could spend all of the loan proceeds early on and have fewer available financial resources for later in life. Keep in mind that if at some point in the future you can’t pay the property taxes or hazard insurance premiums, the lender can foreclose.
Reverse Mortgage Lenders
It is interesting to note that most big banks have gotten out of the reverse mortgage business. MetLife, Bank of America, and Wells Fargo, which were among the top issuers of reverse mortgages, have all exited the market. As a result, smaller mortgage brokers and lenders tend to be the only ones offering reverse mortgages to consumers.
When a Reverse Mortgage Might Be a Good Idea
There are some situations where a reverse mortgage might be a good solution for your situation. If you are house rich, but cash poor, a reverse mortgage might be a good way to keep your home and still be able to meet your needs.
Example. Let’s say that a homeowner is an 85 year-old widow who owns her home outright. She needs to hire some extra assistance, perhaps a daytime nurse, so that she can remain living in the home instead of going to a nursing care facility. Her monthly income is sufficient to pay for basic needs, including taxes, insurance, and maintenance for the property, but not enough to cover the added expense of hiring a nurse. The additional monthly amount received from a reverse mortgage could allow her to hire a nurse so that she can remain living in the home.
If appropriate for the situation, a reverse mortgage can be a good way to keep living in the home, while simultaneously gaining access to the money needed to cover certain costs.
For More Information
It is highly recommend that you proceed cautiously if you are thinking about taking out a reverse mortgage. They can be expensive and the mortgage contracts are complicated. If you are considering a reverse mortgage, be sure that you understand all of the risks and conditions involved.
For more information on reverse mortgages, visit the AARP’s reverse mortgage webpage at www.aarp.org/revmort.
To learn more about Home Equity Conversion Mortgages (reverse mortgages insured by the U.S. Government through the Federal Housing Administration), go to www.hud.gov and enter "Home Equity Conversion Mortgage" in the search box to find a list of relevant links.