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Avoiding Reverse Mortgage Scams

Avoiding Reverse Mortgage ScamsDaniel Cohen
UpdatedOct 29, 2012
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    4 min read
Key Takeaways:
  • Avoid paying for information
  • Don't downplay the counseling session
  • Check for unspecified and costly repairs
  • Check for blank forms and incorrect information
  • Look out for unethical lending terms

Identify a reverse mortgage scam and avoid it

Reverse mortgages are gaining in popularity as senior's look for ways to supplement their retirement incomes. And as the interest in reverse mortgages increases, so are cases of reverse mortgage fraud. Many seniors are finding that they have lost thousands dollars of their hard earned equity to these reverse mortgages scams.

Since reverse mortgages typically involve our largest asset (your home), this type of fraud can have a serious negative impact on your retirement. The following reverse mortgage fraud information will help you avoid becoming a victim of a reverse mortgage scam:

  • Charging for free information on reverse mortgages: Several estate planning companies have been charging thousands of dollars for information provided free from HUD. Typically these companies charge for this information as part of an estate planning program. Seniors that sign up for these programs are unaware that these firms are collecting thousands of dollars by charging a fee of 6 to 10 percent of the total amount borrowed. These fees cost the victims $6,000 to $10,000 on a $100,000 reverse mortgage.
  • Downplaying the counseling session: Time with an independent, HUD-approved counselor is an important step in learning more about reverse mortgages. After speaking with a counselor, you may find that a reverse mortgage is not a good fit for your needs. Be educated about reverse mortgages and understand all the fees, costs, and benefits before securing a loan.
  • Unspecified repairs and costly repair jobs: If a repair is requested by the lender, be sure to ask for the specifics and know what you are paying for. Additionally, consult various contractors to obtain the best price possible. It may be possible that the lender-recommended contractor is working with the lender and charging exorbitant prices.
  • Blank forms or incorrect information: When closing your loan, always review all the documents, forms, and fees with your lender. Never sign any forms with blank fields or incorrect information.
  • Pushing reverse mortgages as a way to pay for purchases: Some companies that sell large ticket items or services, like annuities or insurance products, may try to suggest using a reverse mortgage as a way fund these purchases. When the additional cost of the reverse mortgage is factored into the purchase, it ends up costing the homeowner much more than the benefit provided by the product or service.
  • Unethical reverse mortgage terms: Some lenders slip in excessive fees and terms into their contracts. These terms can have a serious effect on a senior's equity. In some cases, lenders have used shared equity or shared appreciation terms, which gives the lender the right to collect a portion of the appreciation when the home is sold or refinanced. The cost of these type provisions can run into the tens of thousands as the home appreciates. These rising cost provisions eat up equity without providing any additional benefit to the homeowner.
  • Lack of disclosure: Even though you can stay in your home and make no more mortgage payments, you still have to pay your property taxes, homeowner's insurance, and maintenance costs, or you could lose your home. Borrowers who take the maximum lump sum at an early age are especially at risk of not having sufficient cash flow, as they age, to cover the mandatory expenses. These risks are not always disclosed. You should know the negatives as well as the positives, before taking a reverse mortgage.

Protect Yourself From Reverse Mortgage Scams

If you are looking into reverse mortgages, there are several things that you can do to protect yourself from falling victim to these types of scams.

  • Speak with a HUD-approved reverse mortgage counselor. The counselor will help you understand reverse mortgages and help you evaluate your situation.
  • Obtain several offers from different reverse mortgage lenders to compare different options. The rule of thumb is to get at least three separate offers so that you have a good comparison of the terms offered. We can get you started with our reverse mortgage savings center.
  • Make sure you understand all the terms and conditions within the reverse mortgage contracts. Your reverse mortgage counselor can guide you through the contracts.
  • You generally have three business days after signing the loan document to cancel it for any reason.

If you suspect that a company is operating in violation of the law, let your reverse mortgage counselor know and then file a complaint with your State Attorney General's office or banking regulatory agency and the Federal Trade Commission (FTC).

Additional Resources

Learn about the three types of reverse mortgage and find out which is right for you in the Bills.com article Understanding and Selecting a Reverse Mortgage.

10 Comments

MMitchell, Apr, 2011
Researching RV, which is basically just reading the lengthy contract and following the math, the buyback price increases exponentially throughout your remaining years. When once signing the contract and receiving the money, your house is essentially owned by the bank which takes possession when the borrowers have expired. If you're not concerned about heirs or selling, this works fine. You have a home for life that you have to maintain as usual; heirs will be responsible for your belongings at demise; Social Security and Medicare are not affected but SSI and Medicaid are likely to be cancelled. Make no mistake: your property is effectively no longer yours in terms of ownership because you and heirs will not be able to afford the buyback price which can accumulate to 3 times the mortgage received.
BBill, Apr, 2011
I am neutral on reverse mortgages: They are an excellent solution for some people, but wrong for others. That said, I would like you to cite your sources for the following, because I have not seen these statements expressed before: 1. "SSI and Medicaid are likely to be canceled." 2. "The buyback price ... can accumulate to 3 times the mortgage received."

I appreciate your comments, and look forward to your reply.

MMitchell, Apr, 2011
My sources are simply the RV banks themselves, their literature whether online or paper. The graphs these companies offer, in quite lengthy form of "hidden in plain sight" are reassuring in tone but clearly spell out the consequnces of waiting, in my representative instance, some 18 years for expected lifetime demise, of some $145,000 received against $434,800 buy back by heirs. Quicken is the parent company. Another, One Reverse Mortgage, offers more up front and $600,000 buy back. As said, it's fine for those who have no compunctions about losing ability of forward deeding their property. I am no accountant but the math is easy and it's right there in print to read. As to allusion to SS, SSI, Medicare, Medicaid, this was found online in those websites that collect opinions and experiences from customers thereof, as well as some reference in the RV literature itself. There is also a bit of doubletalk of "loan" category of RVs which supposedly precludes any tampering with SSI &c and of taking out insurance policies that would cover the buy back amount, not very credible that suggestion - this remains inchoate and glossed over.
BBill, Apr, 2011
Thank you for your reply. Your pointing out borrowers should read their loan documents to understand the terms and conditions of their loans is wise counsel.

The funds from a reverse mortgage loan are not wages or income, which is what the Social Security Administration bases its eligibility for, and level of retirement benefits. Similarly, Medicare eligibility is based on age and citizenship (and for people of any age with certain chronic medical conditions), and not income. I can understand how some people may mischaracterize their reverse mortgage funds as "income" when applying for Social Security benefits, which if unquestioned by the SSA, may disqualify them from receiving benefits.

If, for example, I lend $1,000 to a Social Security beneficiary, that person does not need to report the cash to the SSA as income for the month — it is a loan.
RReba Francis, Jun, 2011
Reverse mortgages may give you cash up front, and you may not have to pay a house payment, but then, in the end, you lose your home. When you die, the house is theirs. Don't plan on doing this if you want to give your property to your family. Money is never free. There is always a big payback and I don't understand why people fall for this.
MMitchell, Jun, 2011
One further issue of import is that a spouse not on the RV contract due to younger age would be disenfranchised at the demise of the mortgage holder, obviously a potentially disastrous outcome. Dower rights apply in this state but it is unclear what conclusions would be drawn in a legal sense of survivor's residential rights via RV. Banks are not known for benevolence.
CCynthia, Jul, 2011
You are correct to say reverse mortgages aren't for everyone. Part of a reverse mortgage specialist's job is to be sure it is the right fit for the client. For some, there are no other options left except bankruptcy or foreclosure and my main concern as a reverse mortgage specialist is NOT the heirs but the aging senior who wishes not to lose their home. (not so say that that is the only type of clients we have) Some chose to involve their heirs in their decision-making, others don't. If borrowers are concerned about what's left for their heirs, there are ways of minimizing the balance. "Buy back" however, gives the wrong impression that the title is given to the bank. It's not any different than any other mortgage: title remains in borrower's name/trust. IF heirs chose to keep the home, they must refinance the balance due.

SSI & Medicaid can be jeopardized IF their monthly reverse mortgage distribution exceeds the SSI/Medicaid allowable monthly income and they did not spend it all down by the end of the month. Unless there is a good reason (to invest or to purchase a property)to draw a large lump sum of the reverse mortgage proceeds, it would be ill-advised to do so especially if you anticipate within 5 years that you may be incapacitated and will require Medicaid/SSI. Any liquid assets sitting in the bank or even gifting large lump sums will be counted against you. Better to leave the proceeds in the growing reverse mortgage line of credit to draw at no additional cost at any time and not owe any of it until it's drawn. Call your local reverse mortgage specialist if you want the real answers. Aloha!
BBill, Jul, 2011
Thank you for your message. Allow me to offer two clarifications. • Social Security and Medicare: A reverse mortgage produces cash-flow, but not taxable income. Therefore, a reverse mortgage will not disqualify a homeowner for SSI automatically. However, a homeowner must be careful about the timing of spending of the reverse mortgage funds. Contact your SSI administrator to learn how to comply with the SSI eligibility requirements. • Medicaid: Use any reverse mortgage cash-flow immediately. Funds retained from one month to the next count as an asset and could affect eligibility. As of this writing, the exemption for total liquid assets is $2,000 for an individual, and $3,000 for a couple. Consult with a Medicaid expert or counselor regarding current eligibility requirements.

The DHS US Administration on Aging Area Agency on Aging Web site contains links to local resources on Medicaid, Medicare, and Social Security.

RRalph, Jul, 2011
I am considering a RV. My agent tells me that it won't affect my SSI benefits, if I use a Credit Line option. My SSA office tells me the same thing. I am still concerned about this. Do you know where I might go to get further information? Thanks. Ralph
BBill, Jul, 2011
If you are not put at ease by what you heard directly from the SSA and from your agent, perhaps you need to speak to an attorney to get the surety that you seek.