What is a reverse mortgage?
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UPDATED: Dec 19, 2011
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Home equity conversion mortgages, more commonly known as reverse mortgages, are a type of home loan that allows individuals to withdraw some of the equity present in their home. Unlike a traditional home equity loan, a reverse mortgage doesn’t require any payment until borrowers stop using their home as their principal residence. Because of this, reverse mortgages are very attractive to the elderly who wish to extract cash from their property under the assumption the reverse home loan will be paid off after they pass away.
When considering a reverse mortgage, borrowers should pursue a loan backed by the Federal Housing Administration (FHA), as that guarantees the borrower certain protections in this fraud-prone market.
Eligibility for Reverse Mortgages
To qualify for an FHA reverse mortgage, there are a few requirements borrowers must meet. Borrowers must:
- Be at least 62 years old
- Own their home outright, or be able to pay their home off with proceeds from the reverse mortgage
- Use their home as the primary residence
The types of homes that qualify for an FHA reverse mortgage loan are:
- Single-family residences
- HUD-approved condos
- HUD-approved manufactured homes
- One- to four-unit homes wherein at least one of those units is occupied by the owner
How Much Do Reverse Mortgages Give?
The amount of money a borrower can receive from a reverse mortgage depends on a variety of factors. The primary factors that affect the amount awarded are:
- The age of the youngest borrower
- Current interest rates
- The value of the home
- The FHA reverse mortgage limit in a borrower’s particular area
- The mortgage insurance premium (MIP) option chosen by the borrower
As a general rule of thumb, borrowers will receive more given the more value a home has, the older the borrower is, and the lower the current interest rates are.
The FBI warns about reverse mortgages being used to defraud senior citizens, as these mortgage loans have become a common tool used by financial scammers. They target unsuspecting senior citizens and con their victims out of the equity in their homes.
Equity theft scams are the most common form of reverse-mortgage scams. Scammers purchase distressed properties (foreclosures, abandonments, auctioned homes) and transfer title to a straw buyer. Seniors are then recruited to purchase the property from the straw buyer and are encouraged to take out a reverse mortgage. The reverse mortgage is originated by appraisers in collusion with the scammers, and the appraisal is fraudulently inflated. The scammers then take the victim to court and extract all of the inflated equity from the home and the senior citizen.
Foreclosure rescue schemes, wherein scammers promise to save a victim’s home from foreclosure through the use of a reverse mortgage, are also very common. The unsuspecting victim believes the scammer and applies for a reverse mortgage but is told his or her house doesn’t qualify. As a result, the homeowner is advised to transfer title to the scammer or an arranged straw buyer so that necessary repairs can be done in order for the property to qualify for the reverse mortgage loan. The scammer then tells the original homeowners to buy back their home or move out.
The FBI offers tips for avoiding reverse mortgage scams. Borrowers should:
- Throw away any unsolicited advertisements
- Don’t believe an offer to own a house with no down payment
- Refuse to sign anything that is confusing or that they don’t understand
- Decline any payment from individuals for a home the borrower didn’t purchase
- Only accept FHA-insured reverse mortgages
- Find a reverse-mortgage counselor and have the counselor guide them through the process