Reverse mortgages are lending constructions designed specifically for elderly people. Essentially, these allow seniors to convert their home’s equity into income, so that they have more to live on than just their social security and personal pensions. However, reverse mortgages can be incredibly risky, and a number of scams already exist, with more appearing regularly. It is very important, therefore, to be aware of the risks and scams that exist with reverse mortgages to remain safe.
How Does a Reverse Mortgage Work?
Reverse mortgages exist solely from homeowners who are at least 62 years old. Furthermore, the property on which they want to release their equity must be their personal principal residence. Finally, the seniors must either own the property outright, or have a significant amount of equity in it. While there are a number of different possible constructions, the most popular is the Home Equity Conversion Mortgage (HECM), offered by the Federal Housing Administration (FHA).
Reverse mortgages are not the same as traditional mortgages. This is because the mortgage holders do not have to repay the loan to the lender by making monthly payments. Rather, they can have their loan paid out to them in a few different ways. These include line of credit, monthly payments, or one lump sum. It is sometimes possible to have a combination of the three. In most cases, the loan itself will not have to be paid back until the homeowner sells the property, moves out of the property, or dies.
While this construction sounds like everything that homeowners could possibly need, it is not actually always the most appropriate option for elderly people. The loans can be incredibly expensive and they tend to come with very complex mortgage terms. Furthermore, there are some unscrupulous lenders out there that try to trick elderly people into opting for a reverse mortgage. They will do this by perpetuating scams or making misleading claims.
Let’s take a look at 5 common reverse mortgage scams.
1. High Pressure Sales
There are some mortgage brokers who specifically target vulnerable elderly citizens and will put them under pressure to take out this type of mortgage. A senior citizen may be exposed to the subprime lending practices that were so common before the global collapse of the housing market. These include aggressive sales pitches, making them feel obliged to take out a loan they don’t need. This is known as a high pressure sale.
2. Tricky Advertising
In many cases, senior citizens are attracted by the idea that these types of mortgages provide ‘free money’, particularly if that is actually how the lender words it. The reality is that these advertisements are misleading, as they don’t list the conditions, fees or risks that come with these types of loans. In many cases, elderly people do not really understand how these loan constructions work, and many mailings are created specifically to make this a more significant issue.
3. Misrepresenting the Risk of Losing the Home
A lot of brokers will tell elderly people that taking out a reverse mortgage means that they will never lose their home. This is actually untrue. All reverse mortgages will become due and payable in a number of different circumstances and they become subject to foreclosure. Some of these circumstances include:
- If the title of the property is transferred or the property is otherwise sold.
- If the borrower moves out for a period longer than a year (for instance due to mental or physical illness) or if the home is no longer used as a principal residence.
- If the borrower does not meet all the mortgage obligations, such as making property tax payments, paying hazard insurance premiums and maintaining the property in an excellent condition.
In other words, a property can be foreclosed upon if an elderly person does something as simple as forget to pay an insurance premium. It is for this reason that elderly people should always learn about foreclosure of reverse mortgages.
4. Not Including a Spouse on the Reverse Mortgage
There are quite a few brokers out there who encourage senior citizens to only include the older spouse on the mortgage. They do this because the amount that can be borrowed depends on the home equity, the current interest rate, and the age of the borrower. One of the reasons why this is so dangerous is that, if the older spouse passes away first, this would mean losing your home. The loan is due in full as soon as the borrower passes away. Hence, if the older spouse is also the sole borrower, then the loan will be due in full and payable. Luckily, new rules were put into place to protect surviving spouses on August 4, 2014. Those who meet certain criteria will be protected if their spouse passes away but they are not listed as the co-borrower on the property itself.
If a reverse mortgage was taken out before this date, however, foreclosures can sometimes be delayed by no more than 60 days. This is the time period the surviving spouse will have in order to deed the home to the lender, sell the property or pay the loan off.
5. Taking Out a Reverse Mortgage Too Early
Taking out a reverse mortgage in your 60s and having it paid in one lump sum may mean that the proceeds are used up quite quickly, leaving you with little to no money later on in life. If, at any point, you are not able to pay your property taxes or your insurance premiums, there is a chance of foreclosure by the lender. This is something you must consider when you take on this type of mortgage.
Tips Provided by the Federal Bureau of Investigation
Because reverse mortgage scams are becoming so common, the FBI has put a list of tips together designed to help senior citizens avoid this type of fraud. These tips are incredibly important and every senior should be aware of them before they consider applying for a reverse mortgage. The tips are:
- To never respond to any type of unsolicited advertisement.
- To be very suspicious of any person or organization who claims that it is possible to own a property without making down payments.
- To never sign anything that you do not 100% understand.
- To never accept a payment from anybody for a home that you haven’t actually purchased.
- To always search for a reverse mortgage counselor yourself and to seek a lot of information.