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In 2017, Mark Diamond was taken to court for scamming over 120 seniors into signing a reverse mortgage agreement, under the guise of a non-existent city-sponsored home repair program. Though he was found guilty, the reverse mortgages remained in place for those taken in by his scam. Many victims found their homes being foreclosed as a result, leading to yet another class-action lawsuit in December 2020 in order to get their homes back.
Reverse mortgages have a solid history and they make sense for many people, but they must understand and abide by the terms of the contract. Misleading advertisements, high-pressure sales tactics, and outright fraud can easily push a senior homeowner into signing up for something that may ruin their future.
Reverse mortgage scams, while very uncommon, are not hard to identify. Your first line of defense against financial scams of any kind is to have your radar up for anything that sounds too good to be true. You’ve heard this before but if it sounds too good to be true, it probably is so stay away from anything that makes promises that are hard to believe.
To protect yourself, don’t sign any contracts that you do not fully understand and don’t trust anyone who tries to pressure you into getting a reverse mortgage. Pressure should never be used to sell any product and if you sense you’re being pushed or bullied, just walk away. The best protection of all, though, is to understand just what a reverse mortgage actually is, how it works and if it can help you.
What Is a Reverse Mortgage?
A reverse mortgage, in short, is a type of loan that converts your home equity into cash. Home equity refers to the market value of your home minus any debts that were secured against it, such as a traditional mortgage or home equity loan. The definition sounds nice in its shortened form, but there are some catches.
The reverse mortgage, just like a traditional mortgage, home equity loan, or HELOC, uses your home as collateral. If you default on the loan, then you will lose your house. It is crucial, then, that you follow the terms of the loan, which are rather unusual compared to other mortgages. If you wish to keep the house, then you should also have a plan for what you or your heirs will do when it’s time to pay. Watch out for unscrupulous lenders that may try to foreclose on your home wrongly or with little warning.
Eligibility and Requirements
In order to qualify for a federally-backed reverse mortgage or Home Equity Conversion Mortgage (HECM), you must be at least 62 years of age, have the majority of your initial mortgage paid off, and live in the home for at least six months every year. You must also have a meeting with a HUD-approved HECM counselor.
In order to maintain the loan, you must keep the house as your primary address, maintain the home, and remain up-to-date on property taxes, homeowners insurance, and any homeowners association fees.
Failure to meet these ongoing requirements causes the loan to default, and the home can then be foreclosed on if the loan is not paid. This will also happen if you’ve died and did not list a non-borrowing spouse or co-borrower.
What Are the Benefits of a Reverse Mortgage?
You do not have to pay the loan on a monthly basis, as you would with other loans. If you are fine with the loan provider taking your house after you, your spouse, and any co-borrowers are done with it, then this can be a convenient way to secure some extra money to pay off hounding debts or increase your retirement funds. You won’t have to pay income tax on the money, either, because a loan isn’t counted as income.
You can use the money from a reverse mortgage however you’d like and you can choose whether to receive the money as a bulk payment, recurring payment, or line of credit. If you follow the requirements, then you, your spouse, and any co-borrowers can live in the home without worry.
What Are the Risks and Consequences of Taking Out a Reverse Mortgage?
Though you are not required to pay back the loan until the loan conditions are no longer met, the loan still generates interest over time. You may expect the rising market value of your property to cover the difference, but it may not rise as you expect. For instance, many people who had taken out a reverse mortgage before 2008 had their homes foreclosed because the housing market crash caused their home equity to plummet and left them with no way to pay back their reverse mortgages when they came due.
In addition, inheritance of the house may not work out as you would expect. If your marriage partner is listed in the agreement as a non-borrowing spouse, then they will inherit the agreement even if they don’t meet the age requirement. If you wish for anyone else to inherit the agreement after you die, however, then they will need to meet the age requirement and be listed as a co-borrower. Otherwise, your heir will be held accountable for paying off the debt. This usually results in selling the house.
Why Would Anyone Take Out a Reverse Mortgage?
A reverse mortgage is not for everyone, but for some, it can be a great solution for the problems that they’re facing. The most common use of a reverse mortgage is for supplementing retirement income or paying off other sources of debt. If you worry about how you’ll afford your retirement and have a lot of home equity, a reverse mortgage might be a good solution for you.
On the other hand, if you want someone to inherit your home, expect to move soon, or don’t think you’ll be able to keep up with the requirements, then this may not be your best option.
To keep yourself safe from scams, don’t trust solicitors and don’t sign something that you don’t understand. Know that reverse mortgages grow in size over time and that you can only keep the home if you meet the requirements, such as staying in the home and paying insurance. Lastly, ensure that your lender is trustworthy and HUD-approved in order to avoid headaches down the line.
Reverse mortgages can be a legitimate solution for many seniors, but they do require caution before entering.