Learn about common reverse mortgage scams and how to avoid them. Protect your home equity with these essential tips and explore safe alternatives.
Reverse mortgages have been around for over 60 years, undergoing some noticeable changes during this multi-decade period. They’re now more regulated than ever, with government entities like the United States Department of Housing and Urban Development (HUD) offering reverse mortgages while imposing restrictions on borrowing limits. The public opinion surrounding reverse mortgages has also shifted dramatically, with many Americans growing increasingly wary of them.
But what changed? The Great Recession is partially to blame, as many older homeowners resorted to reverse mortgages to cover everyday expenses in times of financial hardship and depleted their equity in the process. The lack of knowledge surrounding reverse mortgages also played a role, leading to more education about this product and the extensive vetting process that exists today. One of the biggest sources of reputational damage, however, is the wide variety of reverse mortgage scams plaguing and preying upon homeowners.
Read on as we explore some common reverse mortgage scams, plus some steps you can take to safeguard your home equity.
Reverse mortgages function just as the name suggests: Rather than making monthly mortgage payments to a lender, homeowners 62 and older can receive a portion of their home equity each month to be repaid when the home is sold or when the borrower(s) pass away. While reverse mortgages won’t be right for every homeowner, they’re legitimate loan products that are now safer than ever, thanks to added protections and regulations.
Reverse mortgage scams, on the other hand, are designed to steal home equity from homeowners or trap them in predatory agreements. There are different types of real estate scams to look out for, but nearly all of them involve individuals posing as reputable professionals—from financial advisors to appraisers to attorneys—to convince homeowners of their legitimacy.
As reverse mortgages have evolved, so have reverse mortgage scams. And while new types of scams (and new attempts at old scams) seem to pop up daily, these are some common reverse mortgage scams to watch out for in 2024.
Reverse mortgage scams are often elaborate productions involving multiple parties who all play a role in the deception. This is especially true in equity theft schemes, where appraisers, loan officers, and even attorneys go into cahoots to scam homeowners out of home equity.
How it works: The scammers produce an inflated appraisal of your home, valuing your property at potentially hundreds of thousands of dollars more than it’s worth and making it appear that you have far more equity than you have. They then convince you to get a reverse mortgage loan to cash in on all this extra equity.
The catch: This inflated appraisal value has no basis in reality. So, while the scammers may be forthcoming about your closing costs and their fees for processing the loan, the actual amount you receive will be far lower than what the appraisal might suggest. When all is said and done, the scammers collect the loan proceeds and leave you with little to no home equity.1
Scammers have long targeted older adults on fixed retirement incomes, especially those who have fallen behind on their mortgage payments. Foreclosure rescue scams prey on these very homeowners, leading them to believe they are receiving mortgage “relief” from individuals posing as investors.
How it works: Foreclosure rescue fraud can happen in a number of ways. The most common method will see a so-called investor approach you with an offer: get out of debt while remaining in your home. They may even say you can repurchase the home or secure new financing down the road. All you have to do is transfer your title as collateral for this new loan, and the “investor” will clear your mortgage debt for you.
The catch: The verbal promises made by the scam artist have no legal basis, allowing them to do anything they want once the sale has closed and they have the home’s title. At which point scammers will often pocket the home equity, default on the loan, disappear, and allow the victim(s) of their scam to be evicted.2
Not all reverse mortgage scams require dramatic illusions to defraud homeowners. Some potential scams can succeed simply with the help of deceptive lenders and costly hidden fees.
How it works: It’s unfortunately common that a licensed or otherwise accredited financial planner will try to convince you to get a reverse mortgage that you don’t actually need. They’ll likely insist that you only correspond with them and that they be the only person to handle your reverse mortgage.
The catch: When a deceptive lender convinces you to trust them and only them, they can say, do, or charge virtually anything they want. This can mean extra fees simply for requesting information or attending a consultation, and may even result in the lender leading you into a reverse mortgage loan only to take the loan proceeds for themself.
It can be hard to tell if an opportunity is legit or if you’re a victime of reverse mortgage fraud— especially with new scams popping up all the time. Fortunately, there are a few tell-tale signs you can look out for to avoid a reverse mortgage scam:
A lender or financial advisor who says a reverse mortgage is a path to free income is not only misrepresenting a reverse mortgage but potentially lying to you in order to scam you out of your home equity.
Knowing what red flags to look out for can help you avoid reverse mortgage scams. But with your valuable home equity on the line, there are additional steps you should take to be absolutely sure what you’re doing is safe.
Taking on a reverse mortgage is a major financial decision that can potentially impact decades of your life. Therefore, it’s all the more critical that you conduct thorough research ahead of time, both to be sure that a reverse mortgage is right for you and that your lender is legitimate.
One of the best ways to do this is by consulting HUD’s list of FHA-approved reverse mortgage lenders. These lenders have been thoroughly vetted by the Department of Housing and Urban Development, ensuring their practices are legal and ethical.3 You may also benefit greatly from speaking with a HUD-certified housing counselor. This service is often free or affordable and can help equip you with the knowledge you need to navigate this process confidently.
Not all financial “experts” are equal. When exploring a reverse mortgage, do your best to seek out skilled financial advisors at trusted institutions. Or, look for someone you’ve worked with previously. If you don’t currently have a relationship with a trusted advisor, look for certified financial planners (CFPs) with experience in retirement planning. Read their reviews, chat with them on the phone, and schedule in-person visits to get to know them better and see if they’re someone you can trust.
Scammers are able to keep defrauding homeowners because many people can’t recognize a scam when they see one. As you research lenders, advisors, and reverse mortgage products, watch for anything that feels fishy and report these potential bad actors to HUD as you see them. Though you might have the know-how to spot potential scams, your friends, neighbors, and fellow homeowners may not. Reporting any and all suspect behavior will help stop scammers while protecting others.
When issued by a trusted, accredited, and legitimate lender, reverse mortgages can be great tools for older homeowners seeking some added financial flexibility. However, there are many reverse mortgage alternatives. If you’re looking for a way to free up your home equity without having to repay a loan in the future, Truehold may be able to help.
Truehold’s sell-and-stay transaction is a simple two-step process that allows you to sell your home and rent it back, unlocking your home equity.* You don’t have to worry about repaying a loan like with a reverse mortgage. And rather than being tied to one location, you’re free to move on when your lease concludes after a minimum stay of 6 months. Or you can continue living in the home as a renter while Truehold covers essential home repairs and property taxes.
If you’re considering a reverse mortgage, Truehold may be a better way to connect you to your home equity. Connect with a Truehold representative today to learn more about our sell-and-stay program and see if your home may be eligible.
Disclaimer*: After the home sale, you must comply with the terms of your lease to continue living in the home. This includes making timely payments on your rent for your minimum lease term (which ranges from 6 – 24 months).
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