How to recognize a reverse mortgage scam

Reverse mortgages can be a useful tool for older homeowners that want to get equity out of their home. 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).

However, because of the high value of real estate, this industry is rife with scammers. Though reverse mortgages are federally regulated, it’s important to keep an eye out for these signs of reverse mortgage scams.

6 common reverse mortgage scams

Here are a few of the most common reverse mortgage loan scams.

1. Foreclosure scams

• How it works: Foreclosure scams 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.

2. Equity theft scams

• How it works: 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 leave the homeowner with a reverse mortgage that they aren’t seeing money from, no equity left in their home, and paying out of pocket for closing costs and fees.

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

3.  House-flipping scams

• How it works: A house flipping scam is when scammers convince a homeowner 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 find that no real work has been done to make the home a worthy investment.

These scams line the pockets of the fraudsters and leave homeowners with little equity in their own property as well as another property that needs significant work before it can be sold for anything other than a loss.

To avoid these scams, 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.

4.  Fraud by relatives or financial planners

• How it works: In this scam, relatives or a financial advisor recommends that a homeowner 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 seniors without any equity in their home, depriving them of the chance to use that equity for income or to gift the home to their heirs.

To avoid these scams, always make sure to involve yourself in the process of getting a reverse mortgage and don’t be afraid to have a lawyer review any paperwork before you sign in.

5.  Veteran reverse mortgage scams

• How it works: Fraudsters advertise specialized VA reverse mortgages, much like VA loans ¹, 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 leaves homeowners paying out of pocket for a loan that isn’t what they thought they were getting and possibly losing home equity.

It’s important to note that 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 or VA Interest Rate Reduction Refinance Loan (IRRL) ² may help you make your payments more managable.

6. Fraud by contractors

• How it works: Contractors approach homeowners, noticing “serious” issues in need of quick repair to create a sense of urgency. They then offer an inflated repair estimate and recommend a preferred reverse mortgage company. The homeowner applies for a loan and pays the inflated bill.

Homeowners later find that the contractor either does shoddy work or has vastly overcharged for the work they did. In the worst cases, the contractor could be working with a fraudulent lender, pocketing the proceeds of the loan.

To avoid this scam, 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.

If you’re thinking of using some of the equity in your home to make home improvements, consider a cash-out refinance ³ from a reputable lender.

Reverse mortgage scam red flags

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

• Jargon and complex terms. Often, contractors or lenders use jargon to create a sense of confusion and uncertainty while positioning them as the expert, convincing homeowners to go along with things because they don’t want to show a lack of understanding.
• 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 good it’s a scam.
• High-pressure sales tactics. Tactics that encourage quick decisions without time to consider pros and cons and other high-pressure tactics are often a sign of a scam.
• Unsolicited advertisements. If you get unsolicited advertisements 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 scammed.
• Voice-recorded phone calls with generic messages. Scammers often cast a wide net, leaving automated voicemails with generic messages in hopes that people will call back, identifying themselves as potential marks.
• You’re told not to speak with others about the loan. 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.
• 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

Here are some additional tips for avoiding reverse mortgage scams.

• Always ask an attorney or lender for accurate information on reverse mortgages.
• Talk with people you trust, such as your financial adviser or family members, for advice.
• Before signing any documents, make sure you fully understand them. Consult a lawyer to get a better understanding before you sign.
• Research any lender who approaches to make sure they’re reputable, such as 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 sought out yourself.
• 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.
• 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 its hotline at (800) 347-3735.

The bottom line: Understanding reverse mortgages protects against scams

Since reverse mortgages are complex, they’re fertile ground for potential scams. Reverse mortgage scams deplete a homeowner’s equity and leave them without cash, potentially putting them in danger of losing their home to foreclosure. If you’re considering a reverse mortgage, educate yourself about how they work and make sure to find a reputable lender.

If you need additional help, you can always discuss your borrowing options with a licensed Home Loan Expert at Rocket Mortgage.

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.

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