Reverse mortgage scams: How to spot and avoid fraud

Reverse mortgages can be a useful tool for older homeowners who want to get equity out of their homes. They offer a secure source of ongoing income and can work well for some homeowners. There are also reverse mortgages that are FHA-insured for people who are 62 and older, known as a home equity conversion mortgage (HECM).

But be aware that, although reverse mortgages are federally regulated, reverse mortgage scams exist. Learn more about reverse mortgage scam red flags, reverse mortgage loopholes, unsolicited offers, your right of rescission, and how to report possible fraud.

Key takeaways:

• Reverse mortgages offer valuable financial support for homeowners age 62 and older, but borrowers should know how legitimate reverse mortgages – including HECMs – work and check that both the lender and loan are FHA-approved.

• Bad actors often target older homeowners via deceptive tactics like foreclosure rescue schemes, inflated appraisals, fake investment opportunities, contractor fraud, and misleading VA reverse mortgage offers. 

• You can protect yourself by identifying common scam warning signs, completing HUD-required counseling, shopping around for and researching lenders carefully, talking with trusted experts, and thoroughly reviewing every loan document before signing.

How legitimate reverse mortgages work

It’s important to know what to look for before committing to a reverse mortgage. Let’s take a closer look at how reverse mortgages operate and how you can tell the loan is not fraudulent.

What is a Home Equity Conversion Mortgage (HECM)?

The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is federally regulated, insured by the Federal Housing Administration (FHA), and available via FHA-approved lenders.

This loan, like other legitimate reverse mortgages, allows you to convert some of your home’s value into cash without selling the property or surrendering the title. You get to keep the title, and the loan doesn’t require payments until you sell the home, pass away, or move out. HECMs require you to be at least 62 years old to qualify.

While HECMs account for the vast majority of reverse mortgages, it isn’t your only option. Instead, you could choose a private jumbo loan if you have a high-value home, or a single-purpose loan provided by local governments or non-profits for particular costs like property taxes.

Is the reverse mortgage legitimate?

To confirm that an HECM is legit, first check that the lender is FHA-approved through the Department of Housing and Urban Development’s (HUD) online lender search page. Look closely at the search results for a dedicated field labeled "HECM: Yes" or "HECM: No". Ensure it says “Yes,” because not all FHA-approved lenders are authorized to originate reverse mortgages.

“Also, confirm that you are required to complete counseling with a HUD-certified counselor before closing,” says personal finance expert Andrew Lokenauth. “This housing requirement is federal law, not optional. So if anyone tries to skip it or steer you to their own hand-picked counselor, that's your signal something’s off.”

What homeowners still have to pay

A reverse mortgage eliminates your monthly principal and interest payments. But you’ll still have other financial obligations. These include paying your property taxes, homeowners insurance premiums, and ongoing home maintenance costs. Be sure to budget appropriately for these ongoing expenses, as failing to keep up with these responsibilities could lead to a default on your reverse mortgage and possibly a home foreclosure.

Common reverse mortgage scams

Here’s a breakdown of some of the most common reverse mortgage loan scams.

Foreclosure scams

Foreclosure cons rely on finding seniors who are behind on the loan payments. Fraudsters convince seniors to use a reverse mortgage to make mortgage payments while charging excessive fees or possibly stealing funds from the reverse mortgage.

These scams can leave you responsible for paying property taxes, homeowners insurance, and maintenance costs without the income from the reverse mortgage. You could end up back in a situation where you’re unable to pay your expenses and may face a reverse mortgage foreclosure.

To avoid these scams, don’t work with people who solicit you to get a reverse mortgage, and only work with a lender you’ve sought out yourself. Additionally, if you need assistance making mortgage payments, reach out to your servicer and ask about your options. While it may damage your credit, you may be eligible for a loan modification, which allows you to extend your loan term or lower your interest rate without refinancing.

Foreclosure rescue bait and switch

Foreclosure rescue bait and switch is another pitfall to watch out for.

“This targets homeowners already behind on payments, promising a reverse mortgage will save their home, then burying them in fees and steering them into a worse financial position than before,” says Lokenauth.

Equity theft scams

In these scams, fraudsters work to inflate an appraisal on a home, convince homeowners to get a reverse mortgage based on this fake equity, and then steal the proceeds at closing.

These scams result in a reverse mortgage that you won’t see money from, no equity left in your home, and being forced to pay out of pocket for closing costs and fees.

You can avoid these ripoffs by getting a second opinion on any home appraisal and only working with reverse mortgage companies you’ve sought out, rather than companies that contacted you unsolicited.

House-flipping scams

A house flipping swindle is when scammers convince you to invest in a property using the proceeds from a reverse mortgage. The scammers buy a cheap property, make superficial repairs, and present it to you as a smart investment, only for you to learn that no real work has been done to make the home a worthy investment.

These schemes can substantially decrease your equity while burdening you with a second property that often requires extensive repairs before it can be sold profitably.

To avoid these cheats, avoid anyone recommending that you invest the money from a reverse mortgage, and instead, only use a reverse mortgage if you need a source of income to live off.

Investment and annuity schemes

Scammers may push you to invest all or part of your reverse mortgage proceeds, or purchase an unnecessary annuity. These products aren’t endorsed by HUD. They usually start with a flyer or web ad, then move to the phone.

Fraud by relatives or financial planners

In this scam, an unscrupulous family member or financial advisor recommends that you get an unnecessary reverse mortgage. Usually, the one making the recommendation handles the loan process on their own and ultimately pockets the proceeds themselves.

This leaves you without any equity in your property, depriving you of the chance to use that equity for income or to gift your home to your heirs.

To bypass these scams, always actively involve yourself in the process of getting a reverse mortgage, and don’t be afraid to hire a lawyer to review any paperwork before you sign it.

Veteran reverse mortgage scams

Some fraudsters advertise specialized VA reverse mortgages that look similar to VA loans¹, offering much better deals on a reverse mortgage than you can get elsewhere, only to help you apply for a regular reverse mortgage while pocketing huge fees or maybe even the proceeds of the loan.

This results in you paying out of pocket for a loan that isn’t what you thought you were getting and possibly losing home equity.

It’s important to note that the Department of Veterans Affairs does not offer reverse mortgage loans. If someone is trying to sell you a reverse mortgage specifically for veterans or one that’s offered or approved by the VA, it’s a scam.

If you’re a veteran who is having difficulty making monthly mortgage payments, a VA refinance loan, or a VA Interest Rate Reduction Refinance Loan (IRRL)² could help you make your payments more manageable. You might also want to explore a cash-out refinance loan.³

Contractor fraud

Here, a contractor alerts you to “serious” issues in need of quick repair to create a sense of urgency. Then, they offer an inflated repair estimate and recommend a preferred reverse mortgage company. You apply for a loan and pay the inflated bill. Only later, you learn the hard way that the contractor either does shoddy work or has vastly overcharged for the labor they performed. In the worst cases, the contractor is working with a fraudulent lender and pocketing the proceeds of the loan.

To steer clear of this con, remember that most contractors who suggest a reverse mortgage are unlicensed, and their repairs – along with being unnecessary – could create more problems than they solve. Always use a reputable, licensed contractor, and don’t be afraid to get multiple quotes for any major home repairs.

Information fee trick

Thieves may try to charge you for information that HUD provides for free. They may also ask for an information fee before they will even talk to you about reverse mortgages.

Don’t pay any fees or deposits unless you’re sure you’re working with HUD, a legitimate lender, or a legitimate agency with HUD’s approval. Also be aware of the risks and costs.

False or misleading advertising

Fraudulent advertising often uses big-print headlines emphasizing how little risk a reverse mortgage involves, how cheap it is, and how safe it is.

Beware of any mailers built to look like an official government notice. It may hint that “a reverse mortgage is some federal benefit you’ve qualified for,” says Justin Fernandez, founder of ScamDrill. “It’s a loan. An honest ad won’t pretend it’s anything else.”

Reverse mortgage scam red flags

When considering a reverse mortgage, watch for these red flags:

High-pressure sales tactics

Methods that encourage quick decisions without time to consider pros and cons and other high-pressure tactics are often a sign of a scam.

“Reverse mortgage scam red flags start with pressure to sign fast, before you have time to think it through,” says attorney Matthew Clark. “A legitimate lender never pushes for an urgent decision on a loan tied to your home.”

Unsolicited offers

If you get unsolicited offers to get a reverse mortgage, it may be scammers looking for marks. It’s always a good idea to do your own research and look for companies on your own to reduce the odds of getting burned.

Vague explanations or confusing jargon

Often, contractors or lenders use jargon to create a sense of confusion and uncertainty while positioning themselves as the expert, convincing homeowners to go along with things because they don’t want to show a lack of understanding.

Cross-selling mandates

“Cross-selling mandates are where suddenly you have to buy an annuity or an insurance policy or a home repair package before you can get the loan,” cautions Fernandez.

Instructions to avoid trusted contacts

Any legitimate reverse mortgage lender will be happy for you to discuss the details with family, your current lender, or an attorney. Anyone telling you not to do so is likely a scammer.

“I have seen the same tactic in insurance disputes, where a company pushes a quick signature before someone can call a lawyer or a family member. Isolation works the same way here. Scammers frame calling your kids or an attorney as something that will ‘slow down your loan,’ when really it’s the one thing that protects you,” Clark adds.

The offer seems “too good to be true”

Any time something seems too good to be true, such as a special loan program that is only available to you or something that offers you “free money,” odds are high it’s a scam.

Voice-recorded phone calls with generic messages

Bad actors often cast a wide net, leaving automated voicemails with generic messages in hopes that people will call back, identifying themselves as potential marks.

The business charges fees for information

Some scammers charge a fee to help get information that you could easily find for yourself for free. You should only pay fees for actual services when getting a loan, such as the fees you pay at closing.

How to avoid reverse mortgage scams

Follow these additional tips to sidestep reverse mortgage scams.

Consult a certified counselor

Sign up for reverse mortgage counseling, even if it’s not required. You can find counselors near you using this search engine from the Department of Housing and Urban Development. Additionally, always ask an attorney or lender for accurate information on reverse mortgages.

Shop around independently

Research several lenders to compare offers carefully, and ensure they’re reputable by visiting the lender’s website, checking their reviews with the Better Business Bureau, and reading reviews from past clients. Ignore unsolicited advertisements, phone calls, and emails. Only work with lenders you seek out yourself. Talk with people you trust, such as your financial adviser or family members, for advice.

Review every document before signing

Prior to signing any documents, make sure you fully understand them. Consult a lawyer to get a better understanding before providing your signature on anything.

“Try to review every document at home, never at a rushed closing table,” Lokenauth says.

Keep control of your home title and power of attorney

Be sure to maintain control over your home’s title, and never sign away your power of attorney under any circumstances.

Attend closings personally

Aim to attend the loan closing personally, whenever possible, since remote or proxy closings are where a lot of the worst fraud occurrences happen.

“A surprising number of these schemes fall apart the moment the homeowner is actually in the room, asking what each page means,” says Fernandez.

Know your rescission rights

Federal law gives you three business days after closing to cancel a reverse mortgage for any reason, with no penalty attached, according to Clark.

“Send your cancellation in writing, by certified mail, so you have a dated record that the lender received it. Without a paper trail, your case turns into your word against theirs, and that’s a much harder fight to win,” he adds. “Keep copies of everything sent and received before, during, and after that window closes.”

Reverse mortgage scam FAQs

What’s the catch on a reverse mortgage?

The catch is that your equity shrinks every month your loan balance grows. This balance increases over time as interest accrues, which shrinks what’s left for your heirs. As a result, the more equity you take out of your home, the faster it vanishes.

Heirs often assume that your house will pass to them free and clear, but that assumption causes real problems later. Also, be aware that origination fees, mortgage insurance premiums, and closing costs can run into the thousands.

What are the newest scams going around?

There’s been a rise in scammers using AI-generated voice calls and texts impersonating HUD or a borrower’s own lender to extract personal information. Also, fake investment webinars continue to target retirees with reverse mortgage cash, often disguised as free retirement planning seminars at a hotel conference room.

What is one of the largest scams involving seniors?

HUD’s Office of Inspector General has documented cases of straw-buyer schemes where scammers transfer a low-value property to an unsuspecting senior, then use grossly inflated appraisals (in some documented cases as high as 10 times fair market value) to pull massive HECM loan proceeds fraudulently, leaving the senior holding the loan and suffering the consequences.

Are VA reverse mortgages real?

There is no dedicated VA-backed reverse mortgage program as there is for VA purchase loans. Veterans can still use the standard FHA-insured HECM program like any other qualifying senior, but be skeptical of any product marketed specifically as a “VA reverse mortgage.”

Where can I report complaints about reverse mortgages?

If you think someone is trying to scam you, report it to the Office of Inspector General at the U.S. Department of Housing and Urban Development by calling 800-CALL-FHA (800-225-5342); you can also file a complaint with the Federal Trade Commission at 877-FTC-HELP (877-382-4357), your state Attorney General’s office, and the Consumer Financial Protection Bureau (CFPB) online or by calling (855) 411-2372.

The bottom line: Be aware of scams

Reverse mortgages are complex, which makes them fertile ground for potential fraud. Reverse mortgage scams can deplete your equity and leave you without cash, potentially putting your home in danger of foreclosure. Protect yourself by understanding how to distinguish legitimate reverse mortgages from scams, recognizing red flags, and involving trusted professionals.

Currently, Rocket Mortgage doesn’t offer reverse mortgages. But if you need additional help, you can always discuss other borrowing options with one of our licensed Home Loan Experts.

¹ Rocket Mortgage is a VA approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rare or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.

³Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.