Reverse Mortgage Scams: 5 Red Flags to Watch Out For

Because reverse mortgages involve complex financial terms and provide seniors with access to large sums of lump-sum cash, they occasionally attract bad actors. While the FHA has implemented numerous safeguards (like mandatory counseling), seniors must remain vigilant against predatory tactics.

Here are the top five red flags of a reverse mortgage scam.

1. The "Free House" Pitch

If a salesperson, mailer, or late-night TV commercial implies that a reverse mortgage gives you a "free house," allows you to "live rent-free," or claims you have "no housing expenses," run away. As a borrower, you are strictly required to pay your property taxes and homeowners insurance. Failing to do so will result in foreclosure. Honest lenders are upfront about these ongoing obligations.

2. The Investment Pressure

This is one of the most dangerous scams. A "financial advisor" will convince you to take out a reverse mortgage in a lump sum, and then pressure you to invest that cash into an annuity, life insurance policy, or complex investment fund they manage. The interest you pay on a reverse mortgage will almost always outpace the safe returns of an annuity. The advisor gets a massive commission, while you drain your home equity. Never use a reverse mortgage to fund an investment scheme.

3. Contractor Fraud

A contractor offers to do major renovations on your home (a new roof, solar panels, a kitchen remodel). When you say you can't afford it, they conveniently offer to introduce you to a "friend" who is a reverse mortgage broker to fund the repairs. Often, the contractor will do shoddy work, overcharge you, and disappear with your loan proceeds. You should always separate your financing decisions from your home repair decisions.

4. Power of Attorney Abuses

Family members or caregivers may pressure a senior into signing a Power of Attorney (POA), which they then use to take out a reverse mortgage on the senior's home and siphon the cash for themselves. If a family member is heavily pressuring you to sign mortgage documents you don't understand, contact a HUD counselor immediately.

5. The "VA Approved" Reverse Mortgage

Many mailers target military veterans, wrapping their advertising in American flags and implying they are offering a special "VA Reverse Mortgage" endorsed by the Department of Veterans Affairs. The VA does not offer or insure reverse mortgages. The only federally backed reverse mortgage is the FHA HECM. Anyone claiming to offer a VA reverse mortgage is lying to gain your trust.

If you suspect a scam, you should report it to the Consumer Financial Protection Bureau (CFPB) or your state's Attorney General.