Reverse mortgages are often touted as a way that older homeowners can convert the equity in their homes into cash. But reverse mortgages can be expensive and the loan terms are complicated. Borrowers often end up in foreclosure due to relatively minor mortgage violations. Additionally, unscrupulous mortgage brokers sometimes try to trick seniors into taking out a reverse mortgage by making misleading claims or perpetrating scams. Unfortunately, many senior citizens fall victim to scammers, who convince them to take out a reverse mortgage they don’t understand.
These loans are designed so that the lender eventually gets its money back (and more) or ends up with the home. Even if you do everything you’re supposed to under a reverse mortgage contract, you probably won’t have money or equity left when the loan comes due and you’ll probably have to sell the property, deed it to the lender, or lose the home to foreclosure. So, if you're thinking about getting this kind of loan, you should fully understand how they work, know the risks and requirements associated with them, and watch out for scams.
Scammer lenders and brokers sometimes fool unsuspecting seniors into taking out reverse mortgages. Here are some scams to watch out for.
Mortgage brokers sometimes target financially vulnerable senior citizens and pressure them to take out a reverse mortgage. Seniors may face pushy brokers who use aggressive sales pitches to push them into loans they don’t need.
Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage, are federally insured through the Federal Housing Administration (FHA). Lenders and brokers who sell reverse mortgages sometimes emphasize the fact that the loan is federally insured as though this protects the borrower in some way. It doesn't. This insurance program benefits the lender. The insurance kicks in when a borrower defaults on the loan and the house isn't worth enough to fully repay the lender through a foreclosure sale or other form of liquidation, like a sale or deed in lieu of foreclosure. The FHA insurance compensates the lender for the loss.
Some advertisements for reverse mortgages state that you get “tax-free money.” But of course reverse mortgage proceeds aren't taxed—a reverse mortgage is a loan, not income.
Also, the advertising usually fails to disclose the fees, conditions, or risks associated with the loan. Often, seniors don't fully understand the terms of reverse mortgages and deceptive mailings only make this problem worse.
While not exactly a scam, homeowners should beware of taking out a reverse mortgage to delay taking Social Security benefits.
Some reverse mortgage brokers and lenders advise elderly homeowners that they should get a reverse mortgage to make up the gap in income while delaying Social Security benefits until they’re older. Because Social Security benefits are delayed, the homeowner gets a permanent increase in the monthly benefit when they start receiving benefits at an older age.
But, according to the Consumer Financial Protection Bureau (CFPB), the costs and risks of getting a reverse mortgage will likely be more than the cumulative increase in Social Security lifetime benefits that a homeowner would receive by delaying Social Security. (For more information about the risks associated with obtaining a reverse mortgage to delay collecting Social Security, read Taking Out a Reverse Mortgage to Delay Collecting Social Security Benefits: Good or Bad Idea? Also, see the CFPB’s August 2017 report).
Some brokers incorrectly state that you will never lose your home or face foreclosure if you take out a reverse mortgage. But this claim isn't true. A reverse mortgage becomes due and payable (and subject to foreclosure) when, for example, one of the following circumstances occurs:
This means a home can be foreclosed for something as minor as unpaid insurance premiums.
Reverse mortgage lenders tend to use celebrities like Tom Selleck, Robert Wagner, James Garner, Henry Winkler, and Fred Thompson in their advertisements. While this isn’t necessarily a scam, the use of celebrity spokespeople is calculated. The lender’s goal is to make you feel confident about the product. Because you trust the spokesperson, you might feel like you don’t need to learn the details about the loan. It’s in the lender’s best interest for you to stay uninformed; once you understand all the requirements and consequences of a reverse mortgage, you might think twice about getting one.
Keep in mind that hiring a celebrity for an advertising campaign is expensive. The lender must recoup this money somehow, and it will likely be in the form of high fees on its reverse mortgages.
Some brokers have encouraged homeowners to name the older spouse as the sole borrower on the reverse mortgage loan. The reason brokers take this tactic is because the amount you can borrow is based on the current interest rate, your home equity, and age.
The problem with this approach is that the surviving spouse is at risk of losing the home when the older spouse passes away. Because the loan becomes due when the last borrower dies, if the older spouse was the sole borrower on the reverse mortgage, the loan is considered due and payable when that borrower dies.
If you take out an FHA-backed reverse mortgage after August 4, 2014, you might be protected if your spouse passes away, but you're not named as a co-borrower on the reverse mortgage, if you meet specific criteria and strictly adhere to all requirements. For HECMs taken out prior to August 4, 2014, lenders have the option to foreclose or assign the mortgage to HUD and the nonborrowing spouse can stay in the home—again, only if specific criteria are met.
If you're thinking about taking out a reverse mortgage with a nonborrowing spouse, be very careful and be sure to talk to a lawyer or HUD-approved housing counselor to learn how to adequately protect the nonborrowing spouse in this situation.
It's highly recommended that you proceed cautiously if you're thinking about getting a reverse mortgage. Tellingly, before you can get a HECM, you must complete a counseling session with a HUD-approved counselor, which is an indication of how complex these loans are and that they're generally not a great idea. It's interesting to note that big banks have gotten out of the reverse mortgage business. MetLife, Bank of America, and Wells Fargo, which used to be among the top issuers of reverse mortgages, have all exited the market.
If you're thinking about taking out a reverse mortgage, be sure that you understand all of the risks and conditions involved. Consider talking with a trusted financial planner or an estate planning or consumer protection attorney before committing to this type of loan.
For more general information on reverse mortgages in general, visit the AARP’s reverse mortgage webpage at AARP.org.