Reverse mortgage scams

Reverse mortgages are a type of loan that lets people ages 62 and over access the equity in their homes without selling. However, the FBI and the U.S. Department of Housing and Urban Development (HUD) urge consumers to be vigilant when shopping for reverse mortgages. Several types of scams are common in the reverse mortgage market, with scammers taking advantage of older adults to steal their equity or sell their homes out from under them. If you’re interested in a reverse mortgage, here are a few scams to watch out for.

Foreclosure scams

Older adults facing foreclosure are particularly vulnerable to reverse mortgage scams. If you’re near foreclosure, you might be targeted by fraudsters who claim that they can help you with a reverse mortgage. While a reverse mortgage can help you avoid foreclosure in the right circumstances, this is also a common setup for a number of possible scams.

Be especially wary if you know that you don’t have more than 50% equity in the home (i.e., you still owe more than half of the original mortgage). This is usually a sign that the “lender” is out to defraud you because that would otherwise be an insufficient amount of equity for a reverse mortgage.

Information scams

Scammers might try to charge you thousands of dollars for information on reverse mortgages. However, this information is often available for free from HUD or other sources, like the Consumer Financial Protection Bureau.

Scammers also target older adults by calling them directly or sending them packages or envelopes advertising information on reverse mortgages. These advertisements might direct the homeowner to pay the fraudulent company for access to exclusive deals or loans they claim are not available anywhere else. Fraudsters also might arrange informational investment seminars at local churches or community centers, claiming to provide inside information while guiding people to invest in their scheme.

Fee scams

Scammers might also attempt to charge you illegitimate fees connected to a reverse mortgage. HUD identifies several terms used to mask these illegitimate fees:

• Counseling fees
• Insurance fees
• Repair fees
• Finders’ fees

However, you shouldn’t just ignore fees with these labels. Take note of who’s charging them and what the context is before deciding whether to pay.

While counseling is a necessary part of taking out a HECM, the counseling program has a set cost (or no cost, depending on your income) and is administered by HUD. That means you don’t need to pay anyone but HUD for counseling.

Likewise, mortgage insurance premiums for HECMs are paid to the Federal Housing Administration (FHA), the government agency that backs the loan. Be aware of the exact amount of your insurance fee, and don’t pay extra to the lender. For non-HECM reverse mortgages, look out for expensive mortgage insurance. If you are considering a different type of reverse mortgage, ask for a list and explanation of fees upfront.

Repairs might be necessary to get your home in good enough condition to be approved for a reverse mortgage. However, scammers might use this fact to defraud you, claiming they are using your money to pay contractors for repairs that never happen.

Mortgage insurance premiums, origination fees and servicing fees are normal. Similarly, appraisal fees, title search and insurance fees, survey fees, inspection fees, recording fees, mortgage taxes and credit checks are all potentially legitimate. Still, scammers might try to add to any of these costs and collect the proceeds.

Investment scams

Con artists might also try to convince you that it is necessary to purchase other financial products in order to qualify for a reverse mortgage. Some fraudulent lenders pressure victims to purchase an annuity with the proceeds of their reverse mortgages. These scammers claim to invest the money on behalf of their victims, then abscond with the money or give it to another fraudulent company that's in on the scam.

Any salesperson that pressures you to spend the funds from your reverse mortgage in a certain way is sketchy. Watch out for claims of guaranteed returns on investments, high fees or lenders who endorse the services of investors and recommend you spend your money investing in certain financial products.

How to avoid reverse mortgage scams

HUD provides extensive information for people seeking reverse mortgages, including a list of HUD- or FHA-approved lenders. To avoid scams, read the HUD reverse mortgage guide so you know what to look for and whether a reverse mortgage is right for your financial situation. The more knowledge you have, the more questions you can ask a potential lender before agreeing to and closing on a reverse mortgage. AARP and the Consumer Financial Protection Bureau also provide information about reverse mortgages.

Check online reviews for any business you’re working with.

Shop around before committing to a reverse mortgage lender. If one company seems to promise much more than the others, be wary. Know your rights, and don’t sign anything you don’t understand or that someone else tries to pressure you into accepting.

Remember that all legitimate HECM lenders require participants to undergo mandatory loan counseling through a certified program. Also, it may be smart to research and choose your own counselor.

Avoid any lender who claims it's “impossible” to lose your home with a reverse mortgage. In truth, failure to pay real estate taxes, property insurance or homeowners association, municipal or local assessment fees could all result in loan default and seizure of your home. Avoid any unsolicited advertisements and anything that sounds too good to be true.

Feel free to walk away at any time before you sign the loan contract if you don’t feel comfortable or if the lender doesn't have the information you request. After signing, if you notice something is wrong, contact HUD if you have an FHA reverse mortgage or the FBI if you have a different type.