How to Protect Yourself From Reverse Mortgage Scammers

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Scammers who are on the prowl for seniors’ hard-earned wealth, could be behind reverse mortgage transactions. It’s a bad idea to use a loan from a reverse mortgage to buy another financial Instrument. Be wary of anyone who wants you to take out such a costly loan in order to fund any risk deal, as it could interrupt your financial planning

Pay day from sales of complicated financial products for example an annuity will sometimes promote reverse mortgages as a way to get into their victims pocket. Scammers use many different schemes to profit and victimize elders. One bad predator can divert the proceeds of a  reverse mortgage from his clients to himself. 

Recently, a few seniors have lost equity and homes after being recruited to act as straw buyers by “investors” who fled with loan proceeds. Many others can contact elders and offer to help them find a reverse mortgage lender, almost always in exchange for a portion or percentage of the loan. Reach out to the Department of Housing and Urban Development (HUD) for details.  

Wondering how a reverse mortgage works? To understand how to best protect yourself from reverse mortgage scammers, you first need to understand what a reverse mortgage is. 

A reverse mortgage is a loan that allows homeowners over the age of 62 to borrow money using their home value as security. Here’s how you can stay protected. 

Understand Your Home is Your Equity

If you fall victim to a reverse mortgage scam, you may be at risk of losing your home.

One downside to a reverse mortgage loan is that you are using your home’s equity while you are alive. When you pass, your heirs will receive less of an inheritance – including the scammer. Some reverse mortgage scams target veterans. Note that the Department of Veterans Affairs cannot offer you a reverse mortgage. 

Understand Your Risk to Your Heirs

When a home sells for more than then what’s left on the outstanding loan balance, the leftover funds can be received by one’s heirs – unless the scammer is involved. The person scamming you could end up being the one who inherits the home.

If anyone living with you is not mentioned anywhere within the paperwork of the loan paperwork, they could be kicked to the curb after your death. Those borders may also be forced to vacate the home if you move out for more than a year reverse mortgages require borrowers to live in the home, which is considered their primary residence

Heirs could receive nothing if a home sells for less. An FHA insurance will cover the lender’s shortcomings. For this reason, borrowers have to pay a mortgage insurance premium on reverse mortgages. 

If a borrower dies or sells their home, the loan immediately is due.  One progressive solution is to list your parameters with the loan paperwork; moreover, no one living under the age of 62 may be a borrower on a reverse mortgage. 

Contractor Scams Are Common

If a contractor approaches you about getting a reverse mortgage loan to repair your home, think twice about it and perhaps sell instead. 

If you’re considering moving due to health concerns or perhaps other reasons, a reverse mortgage would be unwise in the short run, as steep up-front costs make such loans economically impractical. Costs may include lender fees, initial mortgage insurance costs, mortgage insurance premiums, and closing costs such as property title insurance, appraisal fees, and inspection fees.

Homeowners who must vacate or sell the property have six months to repay a loan. While many borrowers may earn their sales proceeds above the balance owed on the loan, many dollars in reverse mortgage costs will have already been paid out.

If your money is scarce, but are unsure if a reverse mortgage is the best idea for your situation, there are other options, such as selling your home and downsizing. Homeowners may also consider renting their real estate, which alleviates homeownership costs such as repairs and even property taxes. Other possibilities include refinancing with a more traditional mortgage.

Understand the Costs

A scammer may try to get more money out of you by inflating costs or charging for an aspect of the reverse mortgage loan that is not legitimate. 

You don’t have to make payments with a reverse mortgage. There are numerous expenses associated with having one, including taxes, HOA fees, and insurances, and you would have to pay an upfront insurance premium. Commonly, this is 2% of your home’s appraised value.  There are also origination fees at closing. You do have the option of rolling these costs into the loan balance, which means you receive less money.

A reverse mortgage will not be considered an income for most tax purposes, but it could impact your ability to qualify for other government-based programs such as Medicaid or Supplemental Security Income (SSI). It’s a good idea to discuss this with a benefits specialist to make sure of your eligibility. 

Ultimately, the decision to take out a reverse mortgage is one you should put critical thought into, all the biggest decisions should be made carefully. It’s an easy way to get cash but has a possibility that it could put your finances at more risk in the long run. Be sure you understand all reverse mortgage risks and benefits before taking it on, including scammers who are willing to take advantage of your situation.

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