Reverse mortgages are often promoted as a terrific way for older homeowners to supplement their income. Unfortunately, many people fall victim to scammers who convince them to take out a reverse mortgage they don’t understand. And most of the time, the loan isn’t in the borrowers' best interest.
For one thing, reverse mortgages are expensive. Also, borrowers can end up in foreclosure due to relatively minor mortgage violations. These loans are designed so that the lender eventually ends up with the home. Even if you do everything you’re supposed to under a reverse mortgage contract, you probably won’t have money or equity left when the loan comes due. You’ll probably have to sell the property, deed it to the lender, or lose the home to foreclosure.
Before getting a reverse mortgage, learn how they work and consider the upsides and, especially, the downsides.
How Do Reverse Mortgages Work?
In a regular mortgage, the borrower gets a lump sum from the lender and makes monthly payments towards paying the money back, including interest. With a reverse mortgage, instead of getting a lump sum that has to be steadily paid back, the owner receives periodic payments or gets a line of credit upon which the borrower makes draws (or a combination of these options).
The periodic payments or draws then become the loan. The loan amount grows every time the lender sends a payment or the borrower makes a draw until the maximum loan amount has been reached. Or, subject to some limits discussed below, the borrower could choose to take out a lump sum.
With a reverse mortgage, the homeowner doesn’t have to repay the loan, plus interest and fees, unless and until specified events happen, as explained below. Sound too good to be true? Many would agree because, in the end, the lender usually gets its money back and more—why else would it engage in this business practice? The balance of this article explains in more detail how reverse mortgages work, their limitations, and the advantages and disadvantages to consumers.
How Much Money Can I Get With a Reverse Mortgage?
Almost all reverse mortgages are Home Equity Conversion Mortgages (HECMs), which are federally insured through the Federal Housing Administration (FHA). (FHA is a part of the U.S. Department of Housing and Urban Development or "HUD.")
This insurance program isn't set up to benefit the homeowner; it’s primarily for the lender's benefit. The insurance will step up if you default on your loan or the loan is accelerated (called due) for some other reason, but your house isn't worth enough to fully repay the debt through a foreclosure sale or other form of liquidation, like a sale or deed in lieu of foreclosure. If this happens, the FHA will compensate the lender for the loss.
HECM Limits
Generally, homeowners over age 62, occupying the property as their principal residence, and with 50-55% or more equity in their home will likely qualify for a reverse mortgage under the HECM program. However, the most money you can get with a HECM is $1,209,750 in 2025, no matter how much equity you have in your home.
How the Lender Distributes HECM Funds
You can choose to have HECM funds distributed as:
- a lump sum
- monthly payments, or
- a line of credit.
You can also get a combination of monthly payments and a line of credit.
First-Year Borrowing Limitations
Before 2013, borrowers could take out 100% of the principal limit all at once. This practice led to problems for many borrowers in the following years because they’d used up the equity in the home and couldn’t get more money or another loan.
Now, federal law limits the amount you can borrow in the first year of the loan to the greater of 60% of your approved loan amount or the sum of the "mandatory obligations" plus 10% of the principal limit. Mandatory obligations include, for example, existing mortgages and other liens on the property.
If you have mandatory obligations, you can get more money to pay those off.
HECM Requirements: Set-Aside Account, Maintenance, and Counseling
Under the terms of a HECM, you must continue to pay the property taxes and homeowners’ insurance. Why is the lender concerned about these matters? If you can’t repay the loan, it will foreclose and sell the house to satisfy the debt. A house that's free of tax liens and in decent shape because insurance money was available, for example, to rebuild following a fire, will fetch more money than one saddled with liens and left to deteriorate.
How a Set-Aside Account Works
To make sure you can stay current on taxes and insurance, the lender assesses your financial situation when considering a reverse mortgage. If the lender determines you probably won’t be able to stay current on these expenses, it establishes a set-aside account as part of the reverse mortgage.
A set-aside account is an amount of money (part of the loan) that the lender keeps to pay the taxes and insurance in the upcoming years. If you have a set-aside account, you get less money from the reverse mortgage.
Maintenance of the Property
Under the terms of the reverse mortgage, you also have to maintain the home in good condition and pay your HOA fees (if your community requires them). The lender isn't taking any chances on the healthiness of the house’s title or its physical condition.
You Have to Get HECM Counseling
Tellingly, you must also complete a counseling session with a HUD-approved counselor. The purpose of the counseling session is to make sure that you understand what you’re getting into. Reverse mortgages are extremely complicated.
HECM counselors have reported that it typically takes at least two hours to explain how these mortgages work and cover all of the topics, such as the costs and consequences, that borrowers need to understand before taking out a reverse mortgage. Even after a long counseling session, many borrowers still don’t fully understand all of the reverse mortgage terms and requirements.
When You Have to Repay the Loan or Face a Foreclosure
With a HECM, the following events allow a lender to accelerate the loan (again, this means to call the loan due):
- The borrower permanently moves out of the home. You might still own the home, but you live elsewhere most of the time. As soon as your principal place of residence has changed, the lender can call the loan due.
- The borrower temporarily moves out of the home because of a physical or mental illness and is gone for over 12 consecutive months. This provision takes into account the experience of many seniors who enter short-term rehabilitation facilities but recover sufficiently to return home. But if you become ill and move into a care facility, like a nursing home, the lender can call the loan due once you’ve been gone from the home for more than a year. (Mortgagee Letter 2021-11, which provides guidelines for HECM lenders, says that some nonborrowing spouses of reverse mortgage borrowers can remain in the home after the borrower moves into long-term care or another healthcare facility.)
- The borrower sells the home or transfers title (ownership) of the home to someone else.
- The borrower dies, and the property isn't the principal residence of at least one surviving borrower. A nonborrowing spouse might be able to stay in the property even after the borrower has died if specific criteria are met. Talk to a lawyer for more information.
- The borrower doesn’t meet mortgage requirements. The lender could call the loan due if you don't stay current on property taxes, you let the homeowners’ insurance on the property lapse, or you fail to keep the home in a reasonable condition.
Your Options If the Lender Calls a HECM Due
If the lender calls the loan due, the borrower (or the borrower's heirs) must:
- repay the loan in full (or pay 95% of the current appraised value of the property, whichever is less)
- give the property to the lender in a deed in lieu of foreclosure, or
- sell the property (for the lesser of the loan balance or 95% of the appraised value). (FHA insurance covers the remaining balance).
Otherwise, the lender will foreclose.
Upsides to a HECM Reverse Mortgage
Reverse mortgages offer some advantages. For one thing, if you’re equity-rich but cash-poor, a HECM reverse mortgage might be a reasonable way to get extra spending money.
Other advantages to reverse mortgages include:
- HECMs are nonrecourse. So, the lender can’t come after you or your estate for a deficiency judgment after a foreclosure. When a lender sells a home as part of a foreclosure in a normal mortgage situation, the proceeds from the sale pay off the loan. If the home doesn't sell for enough to fully repay the debt, the difference between the total debt amount and the sale price is called the "deficiency." Depending on state law and the circumstances, the lender might be able to get a deficiency judgment from a court, which makes the borrower personally responsible for paying the deficiency, but not in the case of a HECM. Jumbo reverse mortgages are sometimes nonrecourse, but not always.
- No payments. As long as you live in the home and don’t break the terms of the reverse mortgage agreement, you don’t have to make any payments on the loan.
Downsides to a Reverse Mortgage
While reverse mortgages have some upsides, these loans also have significant drawbacks. The lender can call the loan due in any of the above-described scenarios. For example, if you don’t pay the property taxes or homeowners’ insurance (assuming you don't have a set-aside account), fail to keep the property in reasonable shape, or breach any of the other mortgage requirements, the lender can foreclose.
A reverse mortgage lender once started a foreclosure because a 90-year-old woman failed to pay the $0.27 needed to get current on her homeowners’ insurance. This wasn't an isolated incident. Reverse mortgage lenders have a reputation for foreclosing on homeowners for relatively minor mortgage violations.
Again, reverse mortgages are designed so that the lender gets its money or ends up with the home. Even if you do everything you’re supposed to under the mortgage agreement, you probably won’t have money or equity left when the loan comes due, and you’ll likely lose the home.
Other downsides to reverse mortgages include:
- The reverse mortgage could affect your eligibility for Medicaid.
- The fees on a reverse mortgage might be higher than a regular mortgage.
- The more money you get from a reverse mortgage, the less equity you have in the home. So, you won't be able to access it later on to cover costs for things like long-term health care costs, to finance a move elsewhere, or leave to your heirs.
How Lenders Make Money with Reverse Mortgages
Having read about the terms and conditions of a reverse mortgage, you can see that the lender will eventually be paid back. If the homeowner doesn't repay the loan, sell the property, or provide a deed in lieu, the lender forecloses and satisfies the loan out of the sale price.
If the sale price is insufficient and the mortgage is federally insured, the federal government makes up the difference. At the very least, the lender has made back its principal, plus interest and fees.
Options Other Than Getting a Reverse Mortgage
Because you get money now and don’t have to pay it back until much later (theoretically), a reverse mortgage might initially sound very appealing. But, because of the drawbacks associated with these loans, it’s wise to consider other options if you’re facing financial difficulties.
For example, you could:
- sell the home and downsize
- apply for federal, state, or local programs that provide grant money or other financial assistance to seniors (such as for utilities or home repair), or
- apply for property tax credits or abatements (reductions). Many jurisdictions provide tax relief options for older homeowners.
Watch Out for Reverse Mortgage Scams
It’s not uncommon for scammer lenders and brokers to trick older people into taking out reverse mortgages. Here are some scams to watch out for.
Misleading Claims That You Won’t Lose the House
To convince older homeowners to get a reverse mortgage, lenders and brokers sometimes tell potential borrowers that they'll never lose their home with this kind of loan. But that isn’t true. A reverse mortgage comes due when one of the triggering events discussed above happens.
Many older homeowners have gone through a foreclosure because of mortgage violations like failing to give the lender proof of occupancy (when the lender, for some reason, thinks the borrower is no longer living in the home), neglecting to pay insurance premiums (which lenders are habitually mistaken about), or letting the home fall into disrepair (based on the lender’s assessment of the home).
Delaying Social Security Benefits and Taking Out a Reverse Mortgage
While not exactly a scam, homeowners should be extremely cautious about getting a reverse mortgage to delay taking Social Security benefits. A reverse mortgage broker or lender might tell you to get a reverse mortgage to make up the gap in income while you delay getting Social Security benefits until you’re older. Because you delay getting the Social Security benefits, you'll get a permanent increase in the monthly benefit when you start receiving benefits at an older age.
However, according to the Consumer Financial Protection Bureau (CFPB), the costs and risks of taking out a reverse mortgage are often higher than the cumulative increase in Social Security lifetime benefits that you'd receive by delaying Social Security. To learn about the risks associated with taking out a reverse mortgage to delay collecting Social Security, read the CFPB’s August 2017 report.
Misleading Claims About FHA Insurance
Again, almost all reverse mortgages are HECMs, which are federally insured through the FHA. Lenders and brokers who sell reverse mortgages sometimes assure potential borrowers in their sales pitch that the loan is federally insured. The broker then implies or even states that this insurance protects the borrower and that the government has, therefore, endorsed the sale of reverse mortgages.
But that’s not the truth. This insurance program isn't set up to help the homeowner—it benefits the lender. The insurance kicks in if you default on your loan and your house isn't worth enough to repay the lender in full through a foreclosure sale. In those cases, the FHA will compensate the lender for the loss.
Deceitful Advertising
Deceitful advertising is another way that lenders and brokers sometimes convince older homeowners that taking out a reverse mortgage is a good idea. For example, some advertisements for reverse mortgages say that you get “tax-free money.” But of course, reverse mortgage proceeds aren't taxed; a reverse mortgage is a loan, not income. Sadly, the siren sound of “tax-free” might be enough to sway a reluctant borrower.
Reverse mortgage advertisements also regularly mention that the loan won't affect your Social Security or Medicare benefits, which is true. But these advertisements usually fail to mention that a reverse mortgage could affect your eligibility for Medicaid.
Use of Celebrity Spokespeople
Reverse mortgage lenders have historically used celebrities like Tom Selleck, Robert Wagner, James Garner, Henry Winkler, and Fred Thompson in their commercials. While this isn’t necessarily a scam, it is calculated.
The lender’s goal is to make you feel confident about the product. Because you trust the spokesperson, you might feel like you don’t need to learn the details about the loan. It’s in the lender’s best interest for you to stay uninformed. Once you understand all the requirements and consequences of a reverse mortgage, you’ll probably think twice before getting one.
Don’t forget that it costs a lot to hire a celebrity for an advertising campaign. The lender has to make this money back somehow, and it will probably be in the form of high fees on its reverse mortgages.
Scare Tactics and High-Pressure Sales Tactics
Reverse mortgage lenders and brokers sometimes use scare tactics and aggressive, high-pressure sales pitches to push vulnerable homeowners into loans. For example, the broker might tell you about a “special rate” that's about to expire or try to scare you by saying that the government is going to cut Social Security benefits. Often, the lender or broker says you need to act immediately, or you’ll lose this great opportunity.
But none of that is true. You don't need to rush into a reverse mortgage.
Tips to Avoid Becoming a Victim of a Reverse Mortgage Scam
Here are a few tips to avoid becoming the victim of a reverse mortgage scam:
- Educate yourself. If you’re thinking about getting a reverse mortgage, learn all you can before you talk to a lender or broker. Learn how a reverse mortgage works and about borrower obligations under the agreement. You can go online and watch videos to learn more. However, stay away from lenders’ promotional videos and lender-based websites. They won’t give you the full story. A good place to start is the Consumer Financial Protection Bureau, an agency of the U.S. government. Take time to learn about the pros and cons of reverse mortgages, and don’t sign any paperwork unless you fully understand how this type of loan works.
- Talk to a financial planner or attorney. Federal law requires that borrowers talk to a loan counselor before taking out a reverse mortgage, but not all counselors effectively explain the ins and outs of reverse mortgages. Because reverse mortgages are very complex and have serious consequences, consider talking to an attorney or financial advisor, too.
- Deal with reputable lenders. If you’re still thinking about getting a reverse mortgage even after learning about all the downsides (like confusing terms, high costs, and the likelihood of an eventual foreclosure), deal with reputable lenders. Be sure to talk to more than one lender so you can compare costs and terms. To find reputable lenders, start with the HUD lender search on the HUD website rather than doing a basic online search. Then, check the lender’s rating with the Better Business Bureau and make sure the lender is licensed. You can usually check the lender’s license status on your state’s official website.
Getting Help
If, after considering all the negatives associated with reverse mortgages you’re still thinking about getting one, again, consider talking to a trusted financial planner or attorney, like an elder-law attorney, first.
For more general information about reverse mortgages, go to the AARP website.
To learn more about reverse mortgage foreclosures, talk to a foreclosure lawyer.