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. But 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.
Reverse mortgages are available for homeowners who are 62 years of age or older and:
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:
Generally, the loan doesn’t have to be repaid until the homeowner moves out, sells the house, dies, or breaches the mortgage contract in some way.
But reverse mortgages can be expensive and the contract 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 What's a Reverse Mortgage?)
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.
HECMs 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 your loan and the house isn't worth enough to fully repay the lender through a foreclosure sale. In that situation, 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 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 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 the 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 taking out 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 taking out a reverse mortgage to delay collecting Social Security, read the CFPB’s August 2017 report.
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:
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.)
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 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. If certain criteria is met, the non-borrowing spouse can remain in the home. (To learn more, see Reverse Mortgages: Foreclosure Protections for Non-Borrowing Spouses.)
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. As a result, smaller mortgage brokers and lenders tend to be the only ones offering reverse mortgages to consumers.
It is highly recommend that you proceed cautiously if you are thinking about taking out a reverse mortgage. This type of loan can be expensive and reverse mortgage contracts are complicated. If you're considering a reverse mortgage, be sure that you understand all of the risks and conditions involved. It's recommended that you talk with an estate planning or consumer protection attorney before taking out this type of loan.
For more general information on reverse mortgages, visit the AARP’s reverse mortgage webpage at AARP.org.
To learn more about Home Equity Conversion Mortgages, go to HUD.gov and search for "Home Equity Conversion Mortgage" to find a list of relevant links.