Reverse mortgage scams are on the rise as seniors are stressed by losses in their retirement accounts. The scams work in a variety of ways and are fairly easy to spot if you know what to look for.
How A Reverse Mortgage Works
A reverse mortgage is a loan available to people over 62 years of age designed to release the home equity in your property as one lump sum or multiple payments. The home-owner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves or enters a nursing home. Typically when the home owner dies, the property will be sold and any value in excess of the mortgage owned will be returned to the estate.
In a conventional mortgage the homeowner makes a monthly payment to the lender; after each payment the equity increases within his or her property. Typically after the end of the term (15-30 years) the mortgage has been paid in full and the property and the borrower owns the property free and clear.
In a reverse mortgage, the home owner makes no payments. All interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home, but in the US the reverse mortgage must be the only mortgage on the home.
Reverse mortgage scams
A very common tactic of mortgage scam artists is to bundle reverse mortgages with something else such as home improvements, annuities, risky investments, living trusts or other estate planning products.
In Seattle recently, elderly consumers were told a that living trust must be purchased in order to obtain a reverse mortgage. In another case, seniors were encouraged to take out a reverse mortgage and use the proceeds to “invest” in truck-mounted billboards.
Another tactic is to use seniors as straw men in a property flipping scheme.
Another popular scam is sales people who pose as a government employee or representative of a non-profit corporation. Unscrupulous reverse mortgage salesmen have been known to represent themselves to elderly homeowners as government representatives or volunteers for non-profit organizations. The most popular form of reverse mortgage – the Home Equity Conversion Mortgage (HECM) – is an official program of the U.S. Department of Housing and Urban Development (HUD). Neither the HECM program nor other reverse mortgage programs are marketed directly to senior homeowners by government employees.
The government has some pretty good information available about reverse mortgages and what you should look for. This information can be obtained by calling HUD at 1-800-569-4287. More information is available at HUD’s reverse mortgage website at www.hud.gov/buying/rvrsmort.cfm.
Protecting yourself from Reverse Mortgage Scams
- Don’t respond to telephone calls or unsolicited advertising or contact.
- Don’t get involved in any deal that involves any other property than your own
- Do not buy any product in the same or related transaction to your reverse mortgage
- Deal with a well-known bank or mortgage brokerage firm. Most scams are run by small independent mortgage brokers.
A reverse mortgage can be a great way to supplement your retirement income and take the equity out of your home –but this is one time you want to be very-very careful and deal with someone you can trust.
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