A reverse mortgage can help senior homeowners increase their monthly cashflow, pay off other debts, or even purchase a new home. And while the FHA’s Home Equity Conversion Mortgages (HECMs) are strictly regulated, the reverse mortgage industry as a whole remains a popular choice for scam artists.
Read the following information carefully to learn how to find a legitimate reverse mortgage offer and how to spot a scam.
What are Reverse Mortgages?
A reverse mortgage is a unique kind of home financing that is only available to borrowers who are age 62 or older and have substantial equity in their homes. Unlike a typical “forward” mortgage, where the borrower makes payments to the lender, in a reverse mortgage, the borrower receives payments from the lender.
The money the borrower receives (referred to as reverse mortgage proceeds) is borrowed against the homeowner’s equity. The proceeds can be dispersed in a variety of methods, including monthly payments, a lump sum, a line of credit, or a combination of these. The reverse mortgage proceeds can be used for anything the borrower wants.
Home Equity Conversion Mortgages (HECMs) are the FHA’s version of reverse mortgages. They are well regulated and insured by the federal government, making them a less risky form of reverse mortgage financing. A traditional reverse mortgage (not insured by the FHA) can still be a legitimate form of reverse mortgage financing; however, the HECM program is growing in popularity due to the increased protections for borrowers.
In addition to the age and equity guidelines, in order to qualify for a HECM the borrower must also participate in a reverse mortgage counseling session. The counselor must be approved by the Department of Housing and Urban Development (HUD). In the counseling session, the borrower is advised of the costs and rules associated with the reverse mortgage to ensure they are making a well-informed decision. This is one way the government protects reverse mortgage borrowers from taking on a loan they cannot afford.
How Scammers Use Reverse Mortgages
Unscrupulous professionals and scam artists prey on the lack of public knowledge surrounding reverse mortgages, target senior citizens who are homeowners, and ultimately attempt to steal their equity. They do this through bogus claims, sometimes even making promises that the homeowners will get a home for free if they sign up.
Here’s what the FBI has to say about it:
“The FBI and the U.S. Department of Housing and Urban Development Office of Inspector General (HUD-OIG) urge consumers, especially senior citizens, to be vigilant when seeking reverse mortgage products. Reverse mortgages, also known as home equity conversion mortgages (HECM), have increased more than 1,300 percent between 1999 and 2008, creating significant opportunities for fraud perpetrators.
Reverse mortgage scams are engineered by unscrupulous professionals in a multitude of real estate, financial services, and related companies to steal the equity from the property of unsuspecting senior citizens or to use these seniors to unwittingly aid the fraudsters in stealing equity from a flipped property.
In many of the reported scams, victim seniors are offered free homes, investment opportunities, and foreclosure or refinance assistance. They are also used as straw buyers in property flipping scams. Seniors are frequently targeted through local churches and investment seminars, as well as television, radio, billboard, and mailer advertisements.
Scam Warning Signs
The key to identifying a fraudulent reverse mortgage is knowing what to look for in a legitimate reverse mortgage.
Legitimate HECMs require that the borrower participate in reverse mortgage counseling session before they can be approved for the loan. The counseling sessions can be done via phone or in person. Learn more about reverse mortgage counseling here.
WARNING SIGN — No counseling session.
The lender says reverse mortgage counseling is not necessary, or doesn’t mention it at all. Any reverse mortgage program that does not require this session, or if it lets you complete a session with anyone other than a HUD-approved counselor, that’s a red flag. You can access a list of HUD-approved reverse mortgage counselors in your area here.
WARNING SIGN — High pressure sales tactics.
If the lender is being pushy and claims to have a really great deal for you that won’t be available tomorrow, that’s a definite red flag!
WARNING SIGN — Lender is not affiliated with National Reverse Mortgage Lenders Association (NRMLA).
This is a professional trade group that most (if not all) legitimate reverse mortgage lenders are affiliated with. Members of NRMLA must adhere to strict ethical guidelines and strive to educate consumers about the benefits as well as risks associated with reverse mortgages. Before signing up for a reverse mortgage, check out the lender’s credentials and look for them on the NRMLA’s list of members.
You may also want to find out if your lender holds the Certified Reverse Mortgage Specialist (CRMP) designation. If they do, not only are they legit–they have excelled in the industry and have created a proven track record of professional ethics and competence.
WARNING SIGN — Someone is trying to sell you a high-dollar product, service or investment opportunity.
Some scammers try to sell senior citizens on an expensive investment, product or service. When the victim balks at the cost, the scammer tries to convince them to get a reverse mortgage to pay for it. Alternatively, the scammer may claim that the senior doesn’t have to pay anything up front or uses wording like, “Make your home equity work for you!” In reality, the scammer’s goal is to get the victim to turn their equity into cash via a reverse mortgage and then hand that cash over to them.
So if you receive an ad, phone call or email suggesting you could be eligible for a “free” vacation home, low-cost home renovation services, “once-in-a-lifetime” investment opportunities, etc., ignore it — or better yet, report it! You can report suspected scams through the FBI’s tip line.
Where to Go For More Information
We aim to provide a comprehensive and extensive online library of consumer information on reverse mortgages. Take a moment to browse through our Reverse Mortgage Learning Center to get more information on these unique and often misunderstood loan products.