How to Avoid Reverse Mortgage Scams
Reverse mortgages are important financial instruments. They are also perfect targets for scams, since they involve both older homeowners and large sums of money. If you are considering a reverse loan, you need to be wise to reverse mortgage scams that you may come across. These range anywhere from over-priced services to out-and-out fraud.
Look Out for These Reverse Mortgage Scams
The following are some ways unscrupulous operators try to victimize seniors with reverse loans:
- Investment schemes. Some sales representatives will try to persuade you to invest the proceeds from a reverse loan into dubious investment programs. These may be fraudulent, or they may simply have excessively high fees. Remember, the point of a reverse loan is to gain access to the equity in your home in order to help pay expenses. Why would you then tie the money up in an investment program?
- House-flipping. Some reverse mortgage scams involve using the proceeds to buy another property. Typically, the idea is to resell that house soon after for a quick profit. There are a few problems with this. First of all, there is no guarantee that the property will increase in value. The person pitching the scheme is no doubt in a position to participate if there are any profits. However, it is your money that is at risk if there are no profits. A second problem is that real estate transactions are expensive. It is very difficult to earn a high enough return on a home in a short period of time to overcome the cost of commissions and closing costs involved in buying and selling. Finally, since the idea of a reverse loan is to gain access to home equity, it makes little sense to promptly tie your money up in the equity of a new property.
- Costly home improvements. Some programs are designed to have you pour the proceeds into costly home improvements. These loans may be a sensible way to finance necessary home repairs. However, you should shop around for contractors to make sure you get a good deal. Also, keep in mind that home improvements generally do not put as much value into a home as they cost.
- Mortgage payment relief. If you are having trouble keeping up with your mortgage payments, a reverse equity program might seem like a good way to retire your current loan. Yet, it is important to make sure that the loan proceeds will go to paying off that loan. Also, keep in mind that the terms of the loan are not more costly than those of the loan you already have.
- High-pressure sales. Just as a general rule, get a sense of how a sales representative is presenting the loan to you. If a sales person seems to be trying to rush you into a decision or discourages you from getting independent advice, you should be very suspicious that this is not an honest proposition.
- Inheritance jumping. Sadly, family members may also be perpetrators of reverse mortgage scams. Sometimes, they are the ones pushing their elder family members to get reverse loans for their own advantage. The premise may be that they want access to some of your wealth now, rather than waiting to inherit it. The problem is, you might need that wealth to pay for your care in later years. So, don’t let anyone talk you into giving up your money. First see how much of it you will need before thinking about passing anything down.
Take Precaution Against Reverse Mortgage Fraud
It can be a little scary to think that there are people who are actively trying to take advantage of you. Fortunately, the good news is that you can avoid being a victim of reverse mortgage scams by taking some precautions:
- Don’t be pressured into hasty decisions. Sales people love to create deadlines to try to get people to act. The tighter the deadline, the more cause you have to question what they are trying to sell you. There is absolutely no reason to make a decision as serious as signing up for a reverse loan on anyone else’s schedule but your own.
- Don’t allow a reverse mortgage to be linked to buying other services. Choosing a reverse loan is a completely independent decision from choices about how to use that money. Don’t let a lender steer the money into products or services such as investments or home improvement without first seeing if there are more competitive options available elsewhere.
- Shopping around empowers consumers. There is no reason you have to take out a reverse loan from the first person who approaches you with one. Shopping around empowers consumers. It gives them an opportunity to learn more about a particular type of product. They’ll also get a sense of what pricing and terms are generally available on the market. Insisting on shopping around is a great way to slow the process down. This will help make sure that you don’t feel any pressure to get into anything.
- Make sure the lender is FHA-approved. Lenders offering reverse loans are required to be approved by the Federal Housing Administration (FHA). Checking an updated list of FHA-approved lenders is a great way of researching the legitimacy of a particular organization. It can also provide you with a list of alternatives to consider.
- Get independent advice before you sign. Receiving reverse mortgage counseling is part of the process of qualifying for a reverse loan. Also, do not hesitate to run any proposal by your lawyer or a family member whom you trust.
- When in doubt, back out. Even if you sign up for a reverse loan, you have three days to back out of the agreement without penalty. It’s acceptable to have second thoughts. This is known as the right of rescission. If you decide to exercise this right, notify the lender in writing and keep a copy of this notification. Send that notice by certified mail with return receipt requested. Upon receipt of this notice, the lender has 20 days to refund the money you have already paid.
Never feel bad about being a tough and skeptical consumer. Legitimate financial professionals will respect that. The only people you will frustrate are the ones who perform reverse mortgage scams. Remember that these are people who are trying to take advantage of you.
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 should file such a complaint in writing. You can file with your state’s Attorney General’s office, your state’s banking regulator, or with the FTC itself. If you suspect the lender you are dealing with is legitimate, but that a representative is acting inappropriately, you should also report that representative to the lender.
Even if you didn’t fall for a particular reverse mortgage scam, if you suspect one you should report it. Getting fraudulent operators shut down will help prevent other homeowners from being victimized.
Consider Reverse Mortgage Counseling
Anyone participating in these mortgages needs to first attend an educational session with a counselor. These counselors must be on the US Department of Housing and Urban Development’s (HUD) approval list. You can find this list on the HUD website. Since this counseling is a necessary precaution, be immediately suspicious of any lender that does not include this step in the process. Also, be sure you are getting counseling from a HUD-approved agency. Make sure that they are completely independent of any provider you are considering.
Reverse loans have legitimate uses, so by no means are they all part of reverse mortgage scams. However, because they create access to very valuable amounts of home equity, they represent very serious financial decisions. This isn’t just a matter of avoiding reverse mortgage scams. With a little research and care, you can choose the right loan with the terms that are most favorable to you.