Reverse Mortgage Scams: How To Spot and Avoid Them

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Are reverse mortgages scams? Not always. Some lenders do offer legitimate reverse mortgages to qualifying homeowners who are over the age of 62 and have paid off all or most of their homes.

But you should definitely be on guard for reverse mortgage scams if you’re considering this type of loan. Scammers often target vulnerable seniors with phoney claims and bogus offers. And even some real lenders have been accused of unauthorized tactics.

7 common reverse mortgage scams

Here are some of the best known ways that criminals try to ensnare older homeowners:

1. Reverse mortgage investment schemes

With this scam, a scammer tries to exploit a homeowner’s fear of missing out by flaunting a “once in a lifetime” investment opportunity that turns out to be fake or much less than what was promised. For instance, a fraudster posing as an investment expert might encourage you to apply for a reverse mortgage so you can cash in on a “rare” insider opportunity, but then disappear after pocketing your money.

2. Illegal investment offers

Also beware of lenders who shamelessly push you to invest the money from your reverse mortgage. Loan officers are legally barred from cross-selling investments like annuities if you’re getting a government-insured Home Equity Conversion Mortgages (HECM). However, some bad actors will still try to pressure clients into purchasing other financial products with their reverse mortgage funds.

3. House-flipping scams

If you’re a fan of home renovation shows or enjoy stories about successful house flippers, you may also be a target. For example, an underhanded real estate agent or loan officer may share a “tip” about a fixer-upper you can buy yourself with cash from a reverse mortgage, but lie about the property’s investment value just in order to secure a commission. Dishonest house flippers might also hide expensive problems with poorly done repairs. All of these are forms of mortgage fraud.

4. Home improvement schemes

Another way scammers take advantage of older homeowners is by luring them into reverse-mortgage-funded home renovation scams. For example, in a high profile case highlighted by the Department of Housing and Urban Development (HUD)’s Office of Inspector General, a home renovation contractor was caught pressuring elderly homeowners into dubious repairs, and then tricking the homeowners into paying for renovations with reverse mortgages.

5. Mortgage payment relief scam

Scammers also like targeting financially distressed homeowners who are worried about missing their payments, but might not qualify for a traditional reverse mortgage. To lure people into agreeing to dubious alternatives, such as a fee-riddled “rescue” loan, scammers often use high pressure sales tactics that appeal to victims’ emotions. This can also include overwhelming you with paperwork that has key details buried inside.

6. Ghost companies

Also watch out for fraudsters advertising phoney reverse mortgage products like “special military veteran reverse mortgages” (which don’t exist). Scammers often try to profit from people’s limited financial knowledge by hawking sham products or by advertising real ones from fake companies. You can check if a lender offering a government-insured reverse mortgage is real by searching HUD’s lender list.

7. Fraud by relatives or advisors

A common form of elder abuse is when people in positions of trust, such as a family member or caregiver, improperly access an older person’s funds. For example, someone who can’t qualify for a loan themselves might secretly apply for a reverse mortgage using a qualifying relative’s information. Or a close advisor, like a lawyer or trustee, may demand access to a client’s loan money and then steal from it.

How to avoid reverse mortgage scams

Stay safe! Here are some HUD guidelines to protect yourself from reverse mortgage fraud.

Things to do

Speak with a HUD-certified housing counselor before taking a reverse mortgage.
Set aside money for ongoing expenses like home insurance and real estate taxes.
Shop around: Compare offers before committing to a single lender.
Trust but verify: Show up for the closing and ensure the funds are sent directly to you.

Things NOT to do

Don’t buy any investments suggested by a reverse mortgage loan officer — they are not allowed to sell you any other financial products.
Don’t let people pressure you into loans that you aren’t sure are right for you.
Don’t expect a free home loan: Reverse mortgages do require an upfront investment.
Don’t delegate power to people that you don’t trust: Never sign a Power of Attorney to someone you don’t know very well.

Reverse mortgage scam red flags

When you’re comparing reverse mortgage offers, be on alert for sketchy promises, especially from unfamiliar companies. For example, here are some statements that could be warning signs:

“You can stay in your home for the rest of your life.” — Maybe, but only if you meet tax requirements and keep it as your main home. You could also be forced out of your home if you fall behind on important bills or home repairs. Reverse mortgages foreclosures can and do sometimes happen.
“You can’t lose your home.” — You can if you default on home-related financial obligations like property taxes or homeowner association fees or don’t adequately maintain the property. You can also lose the home to foreclosure if you move to a new house, but fail to pay the remaining loan balance.
“You’ll be able to pay off all your debts.” — This isn’t really true, since a reverse mortgage is still a costly loan. Also, some debts like for federal tax and student loans, disqualify you from the most common reverse mortgages, so it’s a red flag if a lender still approves you.
“You won’t have any payments.” — Partially true: You won’t have to keep up with a mortgage payment while you’re alive, but you’ll still have to pay other home expenses.
“You won’t have to pay any costs.” — Don’t be misled: It’s true that reverse mortgage fees are added to the loan balance, so they can be paid by your estate. But they do add up.
“Our program is affiliated with the U.S. Government.” — It’s not: Some reverse mortgages like HECM loans are insured by the Federal Housing Administration (FHA), but they still come from private companies. It’s illegal for lenders to suggest otherwise.
“If you’re 62 or older, you qualify.” — Maybe: Besides age, you must also meet other requirements for a government-backed reverse mortgage, like having a small or zeroed-out mortgage balance, as well as adequate savings. You must also agree to mortgage counseling, must live in the home as a primary residence and must keep it in reasonable condition.
“You can delay taking Social Security.” — You can do this if the loan balance is big enough to support you, but the higher Social Security payments you’ll earn in exchange for the delay are unlikely to outweigh the loan’s interest and fees. Plus a big cash deposit from a reverse mortgage could make you ineligible for other benefits like Supplemental Security Income (SSI).

Know your right to cancel a reverse mortgage

You have the right to cancel a reverse mortgage application, even if you get through the entire reverse mortgage loan process. This is called your right of rescission, and it usually gives you three days after you sign the paperwork to cancel the loan with a written notice. And likewise, the lender can’t force you to sign the closing paperwork if you don’t feel comfortable with any of the terms.

How to report a reverse mortgage scam

The Federal Trade Commission (FTC) advises you to file a complaint if you suspect reverse mortgage fraud. You can file your complaint in writing with your state’s attorney general’s office, your state’s banking regulator, and with the FTC itself.

If you suspect the lender you are dealing with is legitimate but that a representative is acting inappropriately, you should report that representative to the lender.

Even if you didn’t fall for a particular reverse mortgage scam, report it if you suspect one. Shutting down fraudulent operators will keep other homeowners from being victimized.

Frequently asked questions

The worst reverse mortgage companies mislead prospective borrowers, charge excessive fees or dupe consumers with other reverse mortgage scams. To find a reputable lender, you can check with home equity lenders on LendingTree or ask your local bank or credit union if they offer reverse mortgages.

Yes, if you default on your obligations, a bank can initiate foreclosure proceedings.

No. A reverse mortgage from a legitimate company can be a useful tool for older homeowners who need help stretching their life savings. But that said, keep an eye out for potential fraud and deceptive marketing.

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