Reverse Mortgage Scam | the ascent

If you run into financial problems as you get older, you might be tempted to take out a reverse mortgage. After all, reverse mortgage companies make it look like you’re borrowing from yourself. Here, we’ll lay out the good, bad, and bad features of a reverse mortgage, as well as possible reverse mortgage scams you want to avoid falling prey to, so you can decide whether to borrow against equity. your home is good for you.

What is a Reverse Mortgage?

When you buy a house, you usually make monthly payments to a mortgage company. A reverse mortgage reverses this arrangement. Rather than paying a lender to stay in your home, you receive payments each month from the equity in your home. The most common reverse mortgage is called a home equity conversion mortgage (HECM).

Not everyone is qualified to take out a reverse mortgage. Borrowers must meet the following criteria:

  • Be at least 62 years old.
  • Spend most of the year at home.
  • Own the home or have a low balance on the mortgage (although you can use the loan proceeds to pay off the rest of the mortgage).
  • Don’t be delinquent on any federal debt, including federal income tax (again, you can use reverse mortgage funds to pay off federal debt).
  • Agree to pay property taxes, insurance and home repair costs.
  • The property must be in good condition. If not, the reverse mortgage lender will let you know what repairs need to be done before you qualify for a reverse mortgage.
  • Get advice from a HUD-approved reverse mortgage counseling agency.

The money you receive from a reverse mortgage is not interest free. Rather than paying interest to a mortgage company, interest and fees are added to the growing loan balance each month. The money you receive through a reverse mortgage, plus interest and fees, eventually has to be repaid. It is normally repaid when you sell the property, or after you die and your heirs sell the property.

How do reverse mortgages work?

One of the disadvantages of reverse mortgages is that they can be confusing. Essentially, a reverse mortgage is an advance on the equity in your home. It’s not until you (or your beneficiaries) sell the house that the lender is paid off. Although you can make payments on a reverse mortgage if you want, most people don’t. Instead, they receive monthly payments, a lump sum, or sporadic equity withdrawals. Each payment reduces the amount of remaining equity in your home.

Although you don’t have to make any payments to the lender, you are responsible for paying property taxes, HOA fees, and upkeep and upkeep of the home. Failure to do so gives the lender the legal right to foreclose on the property or call your loan back when due.

Is a reverse mortgage a scam?

Whether a reverse mortgage is a scam is a tricky question. This is because a reverse mortgage can help a homeowner in so many ways. For example, some reverse mortgages have no income or credit requirements, making it easier for the homeowner to access the equity in their property. Funds received from a reverse mortgage are not taxable. And owners who don’t care about leaving their property to heirs don’t have to worry about how the house is run after they die.

However, the dark side of reverse mortgages should also be considered. Possible problems include:

  • The number of additional charges added to the loan balance. These include interest, origination fees and mortgage insurance.
  • The interest rate on most reverse mortgages is variable, meaning it can go up, eating away at equity at a faster rate.
  • Interest paid on a reverse mortgage is not tax deductible.
  • Some reverse mortgage lenders prey on homeowners who need money to cover their bills.

What is a Reverse Mortgage Scam?

Like any scam, a reverse mortgage scam starts with gaining a homeowner’s trust. Scammers have a special ability to focus on what desperate people need. They lie about what a reverse mortgage can do for the homeowner and fail to fully explain how much it will cost. Some reverse mortgage scams work by tricking older homeowners into making expensive repairs they don’t need.

Given the number of landlords who have lost their property to this type of scam, it’s safe to say that scammers prefer to work with landlords who don’t ask too many questions. For this reason, they often target people who don’t speak English well or older owners who they may confuse.

How Do Reverse Mortgage Scams Work?

No two scams are the same. Scammers tailor their scam to the needs of a specific owner. However, here are some of the most common reverse mortgage scams:

Equity theft

It takes a whole team to make an equity theft scam work. An equity theft scam occurs when a dishonest appraiser, lawyer, and loan officer work together to inflate the value of a home, tricking the homeowner into believing there is more equity in their home than there isn’t. The scammers enthusiastically encourage the homeowner to “benefit” from all that equity by taking out a reverse mortgage. “Don’t worry,” they say. “We take care of everything for you.”

After the homeowner signs the reverse mortgage documents, the appraiser, lawyer, and crooked loan officer take care of the documents. Once the loan is closed, they take the proceeds, leaving the owner with nothing.

house flipping

In this scam, the scammers convince an elderly homeowner that the best way to use the equity in their home is to take out a reverse mortgage and use the proceeds to buy a repairman. The scammer promises to “flip” the house so the landlord can use it as a rental property. The scammer then buys the cheapest house he can find, does just enough repairs to make the owner think he’s keeping his promise, and then walks away with the rest of the money. By the time the landlord realizes what has happened, he has lost all equity in his primary property and has a “rental house” that is in poor condition.

Fraud by someone the owner knows and trusts

This is perhaps one of the saddest reverse mortgage scams because it involves someone the owner trusts. This type of scam occurs when a financial advisor or relative asks a homeowner to take out a reverse mortgage. They promise to manage the money so the owner doesn’t have to worry about anything. They can even convince the landlord to give them financial power of attorney, talking nicely to them all the way to the attorney’s office. On the day the loan closes, the trusted friend or advisor deposits the money in their own bank account, leaving the homeowner to fend for themselves.

How to recognize a reverse mortgage scam?

It pays to be wary of anyone who seems overly interested in the equity in your home. Here are some of the red flags associated with reverse mortgage scams:

  • You have trouble understanding how the reverse mortgage works.
  • It’s as if the person explaining the reverse mortgage is deliberately confusing.
  • The offer made seems too good to be true.
  • The person making the offer wants to manage your loan proceeds.
  • You are contacted by people you do not know. These can be emails, phone calls or unsolicited advertisements.
  • You’re told there’s “no need” to check with a lawyer or financial adviser before signing any papers.
  • Someone offers to talk to you about a reverse mortgage, but charges a fee to do so.

Is a reverse mortgage safe?

Let’s say you break a hip and need to recover in a care facility. If you don’t have the cash to pay and don’t want to drain your bank accounts for Medicare to take over, a reverse mortgage might be a good way to pay for that expense using the equity in your home. your house.

However, it is important to remember this: you are free to take only what you need to pay for these medical expenses and reimburse them when you can. There’s no reason to use all the equity in your home if you don’t have to.

So yes, a reverse mortgage can be safe. Your best decision is to speak with someone you trust first, whether it’s an adult child, your lawyer, or your financial advisor. Never allow a salesperson to tell you about a reverse mortgage that you don’t fully understand.

Finally, if you take out a reverse mortgage, make it a HECM. HECMs are government insured and provided by FHA approved lenders. These lenders have additional guidelines in place to protect you as a borrower.

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