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Guide to Reverse Mortgages: Is the Income Worth the Risk?

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Although they have received increased attention in recent years, many consumers still have a hard time fully understanding what reverse mortgages are, how they work and who they benefit.

Continue reading for a thorough explanation on the above topics, plus a discussion of the advantages and disadvantages of this complex financial product.

What is a reverse mortgage?

A reverse mortgage is a loan that allows senior homeowners to borrow money against their home’s equity. Instead of making monthly payments to their mortgage lender, the homeowner receives money every month from their lender — or receives a larger amount in a lump sum. The balance owed to the lender grows over time and isn’t due until the homeowner moves out, sells the property or passes away.

Reverse mortgages are the opposite of a “forward,” or traditional, mortgage, which allows a borrower to purchase a home and repay their lender on a monthly basis. With traditional mortgages, the balance owed reduces over time until it’s completely paid off.

In both forward and reverse mortgages, the property is used as collateral for the loan. Only homeowners who are at least 62 years old can take out a reverse mortgage.

Reverse mortgage types

There are three types of reverse mortgages available to homeowners depending on their situation.

Home Equity Conversion Mortgage (HECM)

This is the most common reverse mortgage and is backed by the Federal Housing Administration (FHA). A HECM offers more flexibility in terms of how payments are disbursed to borrowers. Payment options include:

  • A single, lump-sum disbursement.
  • Fixed monthly advances over a specified period of time.
  • Fixed monthly advances as long as you live in your home.
  • A line of credit.
  • A combination of a credit line and monthly payments.

Single-purpose reverse mortgage

As the name suggests, this type of loan is used for a single purpose, such as covering home repairs or property taxes. Loan proceeds are typically distributed in a lump sum to cover the homeowner’s financial need. Single-purpose reverse mortgages are offered by nonprofit agencies and some local and state governments.

Proprietary reverse mortgage

This loan is offered by private lenders and usually benefits borrowers with high-value homes because they may receive bigger advances.

How a reverse mortgage works

A reverse mortgage is a loan that takes a portion of your equity and converts it into payments made to you. The money you receive is typically tax-free, according to the Federal Trade Commission. Unlike a traditional home equity loan, you are not required to pay back a reverse mortgage on a set schedule.

Let’s look at an example of how a reverse mortgage works:

John is retired, has paid off his mortgage and owns his home outright. He wants to stay in his home, but needs to supplement the monthly income he receives from Social Security and his pension.

The total amount John can borrow using a reverse mortgage is based on his age and that of his spouse, current mortgage rates and the home’s value; these limits are imposed by HUD. Here’s how the numbers could possibly work out for him, based on LendingTree’s reverse mortgage calculator:

Value of the home $300,000
Title holder’s age 70
Mortgage balance $0
Lump sum estimate $145,902

Based on the calculator, John might qualify for as much as $145,902 if he decides to go the single disbursement route. An advantage of getting a lump-sum payment from your lender is that the interest rate will be fixed, unlike the other options which have an adjustable interest rate.

The reverse mortgage loan limit is $726,525 for 2019, which is 150% of the conforming loan limit of $484,350 for forward mortgages. Still, even if the amount of equity you have is lower than the loan limit, you won’t be allowed to borrow the full amount.

The amount you’re allowed to borrow for a reverse mortgage is determined by the age of the youngest borrower, the home’s appraised value and the anticipated interest rate. Generally, the older you are, the more you can borrow.

Costs and fees

The most common fees associated with a reverse mortgage include:

  • A loan origination fee, which could cost up to 2% of the loan amount.
  • An initial mortgage insurance premium, which is a flat 2% fee.
  • An annual mortgage insurance premium, which is 0.5%.
  • Housing counseling, which usually costs about $125.

There are also additional closing costs and interest fees.

Reverse mortgage requirements

Senior homeowners who are interested in borrowing a reverse mortgage must meet the following requirements:

  • Be at least age 62 or older.
  • Own your home outright or have a small remaining mortgage balance. If you still have a loan, a good rule of thumb is to have at least 50% equity in your home, because you’ll first need to use the reverse mortgage funds to pay off the outstanding balance on your forward mortgage.
  • Must be seeking a loan backed by your primary residence.
  • Have no federal debt delinquencies, including student loans and taxes.
  • Proof of sufficient income to cover your property taxes, homeowners insurance and other housing-related expenses.
  • Demonstrate your creditworthiness as a potential borrower. While there isn’t a minimum credit score requirement, it helps your case to be responsible with your credit usage by maintaining on-time payments, keeping your balances low, etc.
  • Participate in an information session with a HUD-approved reverse mortgage counselor.

Most reverse mortgages have what’s called a “non-recourse feature,” which means if the lender takes legal action against you due to default, the lender can only use the home to satisfy the defaulted debt and can’t come after you for any difference between how much you owe and the home’s value. This also applies to your heirs in the event you pass away and the home is sold to repay the debt.

4 things to watch for when taking out a reverse mortgage

Just like all other financial products, a reverse mortgage comes with its share of risks, which typically include the following:

Higher financing costs

Compared with a forward mortgage, the fees associated with a reverse mortgage are more costly. As an example, a HECM lender can charge an origination fee equal to $2,500 or 2% of the first $200,000 of your home’s value, whichever is greater, plus another 1% for any home value amount above $200,000. The maximum allowable origination fee is $6,000. By contrast, the average origination fee for a traditional mortgage is just under $1,000, according to data from Value Penguin, a LendingTree company.

Increase in debt

You receive income from a reverse mortgage, but it’s still a loan that you or your estate will be responsible for repaying. Since you’re borrowing from your home’s available equity, your loan balance increases over time, which adds to your outstanding debt load.

No tax deductibility

The IRS treats the income received from reverse mortgages as loan advances, and for that reason any interest paid on a reverse mortgage isn’t tax-deductible.

Rising interest rates

The majority of reverse mortgage products have an adjustable interest rate, which is subject to market fluctuations. Your rate will be at a high risk of increasing very quickly.

Reverse mortgage pros and cons

Consider the following benefits and drawbacks before applying for a reverse mortgage:

Pros

  • Increase in your monthly income. If you opt for monthly payments from your lender, a reverse mortgage gives you additional income every month on top of any retirement income you already receive.
  • Flexibility to use the funds how you see fit. If you take out a HECM or proprietary reverse mortgage, there aren’t restrictions imposed on what the money is used for.
  • Ability to stay in your home. Not only do you get to keep your home, but you can keep it in your family after you pass away if your estate is able to fully repay the reverse mortgage.
  • Free from underwater mortgage stress. If your loan balance becomes greater than your home’s value, you likely won’t be on the hook for the difference between the two.

Cons

  • High upfront costs. There are origination fees, mortgage insurance expenses and closing costs in a reverse mortgage transaction. If you choose to cover these costs with your loan, you’ll receive a smaller payout.
  • Decrease in your home equity. With a reverse mortgage, your loan balance grows and your available equity shrinks over time.
  • Loan becomes due if you have a change of heart. If you decide you want to move out of or sell your home, the outstanding balance on your reverse mortgage becomes due immediately.
  • Adjustable-rate mortgage. Most reverse mortgages have adjustable interest rates that will likely increase over time. As of January 2019, the latest month for which data are available, reverse mortgage rates range from 3.583% to 7.019%, according to FHA statistics.

Shopping for a reverse mortgage

The first few steps you should take when you decide you want to apply for a reverse mortgage are to educate yourself on how reverse mortgage programs work, and to determine which loan type works best for your financial situation.

Once you have those details figured out, gather multiple quotes from reverse mortgage lenders and compare the costs and fees to find the best deal available. Ask questions about any and everything that seems unclear, and don’t forget to consult a HUD-approved reverse mortgage counselor for extra help.

Consider the interest rate each lender charges, as well as the origination fee and other closing costs. Additionally, work with each lender to determine how folding the financing costs into your loan will affect the amount you ultimately receive and whether it makes sense to pay those costs out-of-pocket instead.

After you’ve closed on a reverse mortgage and — for some unforeseen reason — decide you no longer need it, you have a “right to rescission,” which means you’re allowed to cancel the deal without penalty. You have a minimum of three business days after the loan closes to notify your lender in writing, and the lender has 20 days to refund any money you’ve paid toward the financing of that loan.

FAQs about reverse mortgages

The timeline varies by lender, but the lending process could take two months or longer. Be sure to ask your loan officer for a rough idea.

No, interest paid on reverse mortgage balances is not tax-deductible.

When you pass away, your reverse mortgage becomes due and payable. If you have a surviving spouse or heirs, they will be responsible for paying back the loan, which might involve selling your house.

For HECM loans, you can find an FHA-approved lender through HUD’s website. For other types of reverse mortgages, a quick online search will reveal public and private lenders in your area.

Reverse mortgage alternatives

A reverse mortgage isn’t the best option for every senior homeowner. If you need money to fund renovations, repairs or other expenses, here are some alternative options.

Borrow a home equity loan or line of credit

If you have a sizeable amount of equity in your home, you might qualify to take out a home equity loan or home equity line of credit (HELOC). You borrow a lump sum of cash with a home equity loan and you’re granted a line of credit, similar to a credit card, with a HELOC. Either of these products might work better if you’re still employed, as they require you to make monthly payments after borrowing the funds.

Refinance your existing mortgage

For those borrowers who still have a mortgage balance, you could refinance your loan by extending the term and lowering your monthly payment amount, which frees up some cash in your budget. You could take advantage of a cash-out refinance, which allows you to borrow a new mortgage that’s larger than what you actually need for your house and pocket the difference.

Rent out a room

Empty-nesters with more home space than they actually need might benefit from renting out one of their bedrooms either through short- or long-term rentals. This generates extra income that can be used for remodeling, traveling or other expenses.

Don’t forget your retirement accounts

As long as you’re old enough to tap your 401(k), IRA or other retirement account without any early withdrawal penalties, going this route is a less costly way to supplement your income. Generally speaking, you can withdraw from your retirement accounts without penalty starting at age 59 ½.

The bottom line

Reverse mortgages come with additional considerations that may not always be a concern for forward mortgages, but they may provide relief for some older homeowners who want to supplement their income and also age in place.

If you can comfortably manage your insurance, tax and other obligations related to homeownership, maintain your property and keep it in good condition, and are confident that your heirs will take care of your home after your passing, a reverse mortgage could work well for you.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
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Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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In a Domestic Partnership? What you Need to Know About Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Domestic partnerships can be the source of a lot of confusion. While they were once commonly referenced in relation to same-sex couples, they are also an option for opposite-sex couples who have a long-term commitment. They allow committed partners to access some of the rights afforded married couples, such as sharing of employer-provided health benefits.

As non-traditional families have evolved over the years, questions inevitably come up about how to handle joint assets purchased and debts incurred within a domestic partnership. Since a mortgage is likely the largest debt a couple will have in their lifetime, it’s important to understand what you need to know if you have a mortgage in a domestic partnership.

What is a domestic partnership?

A domestic partnership is a legal agreement created to formalize a relationship between a couple so they can obtain some protections under the law. Domestic partnerships are usually formed by signing a state registry, but can also be created privately in states that don’t recognize them.

In the past, domestic partnership have mainly been characterized as alternatives to marriage for same-sex couples. Up until a landmark Supreme Court ruling made same-sex marriages legal nationwide, domestic partnerships were a common option for same-sex couples to be given some of the basic legal rights as married heterosexual couples, such as sharing of employment insurance benefits.

However, opposite-sex couples may choose domestic partnerships over marriage for a variety of reasons, financial or philosophical. There are important things that domestic partners should know about mortgages, regardless of whether the partnership involves a same-sex or heterosexual couple.

It’s important to know that domestic partnership laws vary drastically from state to state. Some only provide marriage alternatives for same-sex couples, while others will only grant the domestic partnership rights to opposite-sex couples over age 62. Be sure you know the laws regarding domestic partnership in your state, or how to protect yourself legally if the state doesn’t recognize them at all.

Why choose a domestic partnership?

Until the late 20th century, domestic partnerships recognized heterosexual couples who lived in relationships that had had the commitment of marriage, without actually getting legally married. Over time, state laws began offering them legal rights under common-law marriage statutes, and the term was expanded to include unmarried couples who lived together in a committed relationship.

According to a Pew research study, the number of couples unmarried but living together reached 18 million in 2016. That’s an increase of 29% from 2007.

The reasons for entering in a domestic partnership range from just not wanting to get married, to wanting a more structured commitment without the formality of marriage. There may be financial benefits when it comes to insurance coverage, and because most state laws regarding dissolution of a relationship are related to marriage, ending a domestic partnership may come with fewer strings attached.

In order to qualify for any benefits, domestic partners must meet the registration requirements of the state they live in, or have private legal documentation that creates the partnership (this applies in states where domestic partnerships are not recognized). There are some criteria that must be met for the domestic partnership to be valid, such as:

  • Neither party is married to someone else.
  • The partners have the legal right to marry.
  • The partners are not related.
  • The partners are currently sharing a residence.

Basic property ownership rights for domestic partnerships

Property ownership rights related to domestic partnerships will vary based depending on the laws of the city and state where the couple lives. This includes the rights a partner has to property that was owned before and during the partnership.

In most cases, it’s in the best interest of couples joined in domestic partnerships to have a will that outlines how jointly owned property will be handled in the event of death. While some states will allow for the surviving domestic partner to automatically receive a percentage of interest in property, other states and cities specifically prohibit this inheritance unless it is documented in a legally binding will.

What you need to know about mortgages and domestic partnerships

On the surface, domestic partners go through the same mortgage pre-approval process as any other couple. Equal Credit Opportunity laws prohibit discrimination in lending based on race, color, religion, national origin, sex, marital status, or age.

Lenders look at income, credit and assets to determine whether domestic partners qualify for a mortgage. The biggest difference in the loan process relates to how domestic partners take title, and notifying the lender of that partnership to ensure the note and deed of trust are compliant with local state and city laws related to domestic partner property rights.

The agencies that provide funding, insurance and guarantees for mortgage lending include Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) and the Veterans Administration (VA). Each of them have updated rules and guidelines related to how domestic partnerships are handled in the respective loan programs they offer, and some of the details are provided below.

Why this information is important to the lender

Besides wanting to confirm you have the ability to repay a mortgage, lenders want a clear path to collect on the debt in the event there is a default. That means they need to know the legal rights of anyone who is on title to the property.

The lender may need to modify or add addendums to a deed of trust involving domestic partners to protect their interest in the property and their ability to foreclose on the parties on title in the event of default or the death of one of the partners.

Because some states don’t recognize domestic partnerships, the death of one of the partners could trigger an acceleration clause — meaning the lender immediately calls the entire loan due, regardless of whether the surviving partner is on title to the property or not. This includes property that was owned prior to the formation of the domestic partnership.

Also, a domestic partnership may affect the way lenders look at debt in the event the relationship ends, and the partnership is dissolved. This is similar to how lenders treat a divorce, which may involve debts that were acquired before and during the relationship, and the division of those debts after the relationship is ended.

Fannie Mae and Freddie Mac domestic partnership guidelines

Fannie Mae and Freddie Mac are government sponsored enterprises that purchase mortgages to promote homeownership and a healthy market of products for consumers to get home loan financing. They purchased 44% of all newly issued mortgages through the second quarter of 2018.

Conventional lending guidelines define domestic partners as unrelated individuals who share, and intend to continue sharing a committed relationship with a borrower who signs the note. Because a domestic partnership can create legal obligations and responsibilities related to property ownership and how it is transferred between a couple, lenders have additional forms and documentation requirements to ensure the deed of trust complies with local laws.

Additional domestic partner information needed on a loan application

The standard uniform residential loan application only provides three marital status options: married, unmarried and separated. You’ll notice that in italics under unmarried, there is a long list of potential options which include single, divorced, widowed, civil union, domestic partnership and registered reciprocal beneficiary relationship.

For a domestic partnership, the correct box to mark is unmarried. However, to avoid jumping through hoops later in the mortgage process, the lender needs to be notified upfront if you are borrowing as domestic partners.

The biggest difference between unmarried couples and domestic partners when it comes to homeownership is domestic partners have more legal rights and responsibilities related to mortgages and homeownership. Domestic partners are required by law to sign legal documents indicating their ownership interest in a property and their obligations to a mortgage — unmarried couples don’t have any legal rights to property owned by their significant other.

Because of the legal ramifications of a domestic partnership, Fannie Mae created an addendum to the Uniform Residential Loan Application that requires both partners answer the following questions:

  • If you selected “Unmarried” in Section 1, is there a person who is not your legal spouse, but who currently has legal property rights similar to those of a regular spouse?

Domestic partners will answer yes to this question. The next section will request additional clarification.

  • If YES, please indicate the type of relationship and the State in which the relationship was formed.

You’ll have several options here, and you’ll want to check the domestic partnership box. If you forget to notify your lender about a domestic partnership, it could create delays prior to closing, when the lender finalize the vesting with the title company, and prepares the final closing documents.

FHA loan changes related to domestic partners

The FHA is a U.S. government agency that insures lenders who provide loans to homeowners. It is one of the most popular first time homebuyer loans, with lower minimum requirements than conventional loan programs offered by Fannie Mae and Freddie Mac.

Up until 2015, the FHA loan definition of a family member was limited to a loan applicant’s spouse, children, parents, grandparents, siblings, aunts and uncles. The definition was expanded to include domestic partners, which gives them full access to the many benefits of FHA financing.

The FHA allows flexibility to receive gifts of down payment and equity from family members, as well as allowing for family to help qualify as co-signers. Domestic partners can now qualify for some of the features reserved for family members under the prior definition.

Here are just a few of the benefits now available to domestic partners for FHA financing.

Gift funds for down payments

The FHA allows all of the funds for a down payment to be gifted by a family member. That means you can receive a gift from a relative of your domestic partner to purchase a home, or gift funds to your domestic partner.

Gift of equity to purchase a relative owned property

The FHA allows a family member to provide a gift of equity toward the purchase of a home that they currently own. That means that you could purchase a “family” home with no down payment required your own funds.

Cosigning on the loan

The FHA allows for a family member to co-borrow with an applicant on an FHA mortgage without having to live there. The co-signer can gift the down payment at the same time, giving mortgage applicants more options to purchase or refinance a home.

This gives domestic partners the benefits of income from either partner’s relatives to help qualify for a purchase.

VA loans and domestic partners

The VA loan program provides the easiest qualifying guidelines of any mortgage program offered. Active duty and military veteran borrowers can purchase a home with 0% down, and under more flexible qualifying income and credit score requirements than the FHA or conventional loan programs offer.

However, one of the major factors in how much of a down payment is required on a home loan is whether the veteran is qualifying for the loan with an unmarried co-signer. Although the recent changes to marriage law allow same-sex marriages to receive the same VA home loan benefits as opposite-sex marriages, that’s not the case for domestic partnerships.

The marriage guideline for VA

The amount of down payment a veteran makes on a VA loan depends on the amount of entitlement available based on a variety of factors including years of service, type of discharge, and branch of the military. One other factor that affects the down payment is whether the veteran is co-borrowing with a spouse or non-veteran.

Only a qualified veteran is allowed to use his or her eligibility to obtain a VA loan. A married veteran’s spouse gets the benefit of the veteran’s eligibility, and if the entitlement is high enough, no down payment is required. If the veteran is not married, and needs a significant other on the loan to qualify, the veteran’s entitlement is cut in half, and a down payment is required.

According to VA guidelines, the VA will only recognize relationships that are organized as marriages under state law. Since domestic partnerships are not considered marriages, VA financing may look at the down payment requirement as a veteran and non-spouse non-veteran co-borrowing transaction, which would require a down payment.

There may be exceptions available if you can prove that the domestic partnership meets the state’s common law marriage standards, but you’ll need to check with the VA lenders, or a regional VA office in your area.

5 ways to hold property as domestic partners

Regardless of which loan program you go with, you’ll first need to decide how you will own the partner as domestic partners. As real property increases in value, how you maintain ownership can determine whether you receive any proceeds from the sale of the property, or have any obligations to the debt.

There are primarily two ways that you can take ownership to a property — as a sole owner or as a co-owner. Some states allow for specific ownership options as domestic partners, and we’ll take at look at those vesting choices below.

Sole ownership

For married couples, the most common vesting (the way a title will be held) for an individual is married as his or her sole and separate property. This gives the person on title the benefits of ownership of the property, including the right to receive any proceeds from the sale of it, and makes them solely responsible for debts that are attached to it, like mortgages or property taxes.

California is one of the states that has a specific sole ownership title vesting designation for domestic partners registered with the state as “a registered domestic partners as his or her sole and separate property.” The partner who is not on title is required to waive all rights to the property with a recorded document called a disclaimer deed. Again, this vesting option is for California, and may not be applicable or enforceable in other states unless state law recognizes domestic partnerships.

Community property

This type of vesting gives husband and wife or registered domestic partners equal ownership in a property. That means that all decisions regarding the sale, or mortgage financing, have to be agreed to by both owners.

Community property gives each owner the right to transfer the interest in any way they want, which means if one partner dies, the other partners doesn’t receive the interest unless a separate written agreement like a will is in effect.

Community property with right of survivorship

This is essentially the same as community property, except the words right of survivorship grant the interest of a partner that dies automatically to the surviving partner without any additional legal measures.

Joint tenancy

Joint tenancy gives all parties equal ownership. The interest is not divided, which means if one party dies, it automatically goes to the surviving party.

The difference between this is and community property, is joint tenancy is mandated by the laws of the state, so one partner cannot will his or her interest to another party — it automatically goes to the surviving partner. In community property, each partner has the right to will interest to an heir or another party upon death.

Tenancy in common

Tenancy in common allows owners in a property to choose the amount of interest they want to have in a property. Unlike joint tenancy and community property, the interest does not have to be held equally, so the parties can split it out in whatever manner they collectively agree to.

This also means that any party on title can sell, will, or lease his interest to another party.

There is no specific designation available for domestic partners when it comes to tenancy in common, since it doesn’t usually apply to a domestic partnership, where committed partners are usually seeking equal interest in anything they acquire for the duration of their relationship.

Advantages of a domestic partnership in mortgage lending

There are a number of advantages to a domestic partnership when it comes to mortgage lending. Joint credit reports can be pulled, and a joint loan application can be filled out, which saves some time on the initial application.

There are also some other qualifying benefits to applying for a mortgage as domestic partners.

Additional mortgage interest tax benefits

Because a domestic partnership is not a marriage, the IRS treats the mortgage interest tax deduction on an individual, rather than joint basis. That means each each partner is entitled to the maximum interest deduction, rather than the deduction being applied to them as a married unit.

As of 2019, the maximum deduction allowed for mortgage interest is $750,000. For a married couple, that is the maximum allowed to be deducted for a qualified primary or secondary home, which is essentially $375,000 for each member of that couple.

As domestic partners, this amount is applied to each partner separately, meaning up to $1.5 million can be deducted between the two partners, effectively giving domestic partners a tax advantage over a married couple.

Disadvantages of domestic partnership when qualifying for a mortgage

There are some drawbacks to applying for mortgages as domestic partners, especially when it comes to qualifying in community property states. There are only nine community property states, and they follow the rule that all assets acquired during the marriage are considered community property.

With community property comes community debt, and that’s where domestic partnerships can add some qualifying challenges to the mortgage process.

Debt is treated the same as being married

Since domestic partnership are effectively legal agreements to a committed relationship, lenders apply that concept to how joint debt is treated. FHA loans and VA loans require that a spouse’s debt be included in qualifying for a loan, even if they are not on the loan.

One thing that many borrowers don’t learn until they apply for a mortgage is that even if they own property with no financing on it, the property taxes and insurance still have to be counted as liabilities. Some borrowers fail to disclose these properties, only to painfully learn later that there are number of quality assurance systems lenders employ to check for property ownership of both domestic partners.

Conventional loans make an exception, so if one partner has a lot of debt and poor credit, a conventional loan may the best, and sometimes the only way to get approved for mortgage financing.

Cohabitating couples avoid this problem by having the person with the stronger credit profile to apply on the loan.

Dissolving a domestic partnership may create qualifying problems

Like any long-term relationship, domestic partnerships can go bad, and decisions will then need to be made about what to do with assets and debt that were created during the relationship. This can get messy given that many states don’t recognize these partnerships, and may not provide clear guidance for property and debt disputes.

This can be problematic if one or both of the partners wants to take out a mortgage in the future, since there will be no divorce decree available to outline the division of property and responsibility for any outstanding debt. In this case, both partners may have to employ attorneys to draft an agreement that outlines the division of debt and assets.

It may be worthwhile consulting a family law attorney at the beginning of a domestic partnership to outline steps that should be followed if the partnership is ended. These agreements work like a prenuptial agreement in a marriage, and may be worth the effort to avoid costly and lengthy litigation.

Final words about domestic partnerships in mortgage lending

With the exception of VA loans, mortgage lenders look at domestic partnerships in the same way as married borrowers. There may be a bit more paperwork involved in the mortgage application, and you’ll need to make sure your interest in any jointly owned real estate is protected either by the laws of the state you live in, or by a separate legal agreement drawn up by a real estate attorney.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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How to Avoid Mortgage Scams

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Considering how heavily regulated the mortgage industry is, it’s hard to believe that mortgage fraud is actually on the rise. Yet one out of every 109 loan applications made from the second quarter of 2017 to the second quarter of 2018 contained elements of fraud, according to a report from mortgage data firm CoreLogic.

Mortgage scams are often very complicated and involve many different people that may convince you that you’re getting a great deal. The emotion tied to getting a home can often lead to impulsive decisions — which is exactly what financial predators count on.

In other cases, you may be an accomplice to a mortgage fraud scam and not even know it.

This guide will help you avoid mortgage scams — with tips to prevent you from becoming a victim or participant in mortgage fraud.

Why mortgage scams are increasing

As interest rates and home prices rise in the 2019 mortgage market, there is less mortgage business to go around. At the same time, it is harder to people to qualify for mortgages under new rules approved since the financial crisis.

With those pressures on both sides of the equation, some mortgage professionals and consumers unfortunately start looking for ways to get mortgage approvals by concocting schemes that circumvent the rules, or straight out violate them, as you’ll see from the examples that follow.

At the same time, technology and all-digital mortgages open the door for phishing scams that try to trick people to send their down payments to the wrong place.

Common mortgage scams in 2019

These relatively new mortgage scams are creating billions of dollars in losses for consumers, bilking them out of down payment money and savings without any way to recoup their losses through the normal protections of the U.S. banking system.

We’ll start with the biggest and baddest of all the new mortgage scams: wire fraud.

Wire fraud is the fastest growing cybercrime in the country, and cost aspiring American homeowners over $1.4 billion in 2017, according to the FBI. In June 2018, the FBI launched a major law enforcement effort, making 42 arrests in the United States, thwarting the theft of nearly $14 million in fraudulent wire transfers.

This scam is very sophisticated, and it’s important you understand exactly what to look for and how to avoid falling victim to this ongoing problem in the real estate and rental sectors of the housing industry.

Five steps to avoid becoming a victim of wire fraud

Once your loan is approved and you’re getting near the contract closing date, you’ll be begin to receive correspondence about where and how to send your down payment and closing costs. Many borrowers will opt to prepare a cashier’s check with their local bank — the safest way to eliminate any possibility you’ll be the victim of wire fraud.

But if you prefer to avoid the extra trip to the bank, or if you only bank online, wiring your money will be your only other option. Your funds will need to go to the title company handling your purchase escrow.

For a purchase financed with a mortgage, the lender will request wiring instructions directly from the title company. The wiring instructions contain information about your escrow, including an escrow number specifically tied to your transaction, with routing instructions for the funds to be deposited into the title company’s account.

Hackers always bypass your lender with wire fraud scams, choosing to hijack the title company email or the realtor email, since they often are in touch with you about the amount needed for closing. A title company will rarely, if ever, give you wiring instructions that aren’t encrypted.

In fact, many title companies will have you set up a user ID and password as part of their communications involving any transaction documents you’ll need to review. If you start receiving correspondence with attachments that you can open without your user ID and password, chances are the email is fraudulent.

Nonetheless, the stress and sometimes hurried nature of last minute scheduling changes is what wire fraudsters count on — that one moment you open an email and click through without making sure the source is legitimate. Once the money is gone, there’s no getting it back.

Below are five steps you can follow that will prevent you from falling victim to wire fraud.

Step #1 :  Never respond to emails giving you wiring instructions

You may get an email that looks just like a legitimate email from your realtor or escrow officer, with wiring instructions you’ll need for your upcoming closing. In most cases, the realtor or the title company’s email is either hacked, or the fraudster assumes the identity of the real estate agent or title agent handling your loan.

Step #2 : Verify the phone number in a public directory

Don’t rely on the contact information in the email. In most cases, the correct contact phone number for the title officer should be in your purchase contract. Use that as a first line of defense, and then use an online directory as a back-up to make sure your actually calling your title officer and not a scammer.

Step #3 : Call your realtor or title officer to confirm if they sent the email

Realtors don’t usually provide wiring information in a financed purchase transaction. Even if you are paying cash, the wiring information should reference the property you are buying, with an escrow number related to your transaction. Again, you shouldn’t be initiating your funding wire until you have signed your closing papers and verified the wiring instructions face-to-face with the attorney or escrow officer handling the transaction. If the email is pressuring you do to that, chances are it’s a bogus request.

Step #4 : Confirm the wiring instructions your lender is using

Mortgage lender closing departments work directly with title companies to verify where the loan proceeds of a mortgage should be deposited. Check the wiring instructructions you received in the email against what your lender provides — if they don’t match, the email is probably a scam.

Step #5 : Don’t send a wire until you have verified the information at the signing with someone face to face

There is rarely a reason to wire funds for a purchase transaction before you have reviewed and signed the closing papers. It’s also a good idea to withhold the money until you’ve confirmed that all of the closing figures are correct and reflect the terms you agreed to in your purchase contract. If you’re taking out a new mortgage, you also want to make sure the final closing disclosure reasonably matches the initial loan estimate.

Of all of the mortgage scams, this one has the potential to cause the most financial damage with the least amount of legal recourse. In many cases, the money is wired overseas, and U.S. law enforcement has less jurisdiction to recover money overseas than within the U.S.

The FDIC insurance protections that safeguard money you have on deposit in your bank account don’t apply to money that you wire. You have several options before hitting the send wire button to verify and re-verify the accuracy of the information, so once you hit the submit button, you’ve effectively certified that you did your due diligence to check the authenticity of the wire source.

Disaster-related home repair scams

In the wake of damage related to Hurricane Michael, which hit Florida in October 2018, distressed homeowners had to deal with a new peril: hurricane relief scams. These range in scope from repair-related scams to impostors posing as FEMA inspectors to “help” homeowners with flood claims on their properties.

The problem is only likely to get worse, as a recent storm surge prediction report puts nearly 6.9 million U.S. homes at risk of damage from future flooding. If the predictions are accurate, total reconstruction costs is estimated to be more than $1.6 trillion.

Just like scammers preyed on homeowners trying to save their homes from foreclosure during the housing crisis, they are now plotting complex schemes to take advantage of homeowners affected by natural disasters.

If you have experienced a hurricane-related loss, or know someone in one of these areas, knowing the signs of a disaster mortgage fraud scheme can help save them the heartache of spending money on an illegitimate repair company, or giving all your financial information to someone posing as a FEMA home inspector.

How this scheme usually works

Communities hardest hit by natural disasters may have seen large disruptions in employment, resulting in financial hardship. Financial records may also have been destroyed in the disaster — leaving homeowners without contact information for their lenders and making them vulnerable to impostors. These fraudsters may pose as lender representatives promising mortgage assistance programs that are little more than fronts for illegal schemes.

Others create official looking identification and pose as FEMA inspectors, requesting social security numbers, dates of birth and other information that is then used by the identity thief to open new credit and make the hurricane victims life even worse. They may even demand payment for inspections up front, which is something FEMA.

Contractors may show up or call indicating they are there to help with repairs, or offer discounted repair services promising to waive deductibles. Never, ever sign any paperwork from these contractors unless you initiated the claim with your company, especially if they indicate they will work with your insurance company to pay for your repairs.

Anyone who has lost financial records related to a home loan should have a credit report run to obtain the contact information directly from the credit bureaus. Equifax, Experian and Transunion will list the contact numbers of all creditors on a credit report, allowing you to make contact with them to let them know about your hardship.

Creditors will never send someone to your area to negotiate debt during a crisis, and you should never speak to someone about anything related to your credit unless you can verify the source of the call. In every case possible, make sure you’re the one who initiates the call, using contact information you already have on file or obtained from your credit report.

This includes anyone offering mortgage modifications, foreclosure rescues, home repairs or reverse mortgages to fix your property after a disaster. If you don’t do the research and seek the company out based on a website or local business office you can visit, don’t give any personal information until you can verify who you are talking to.

Mortgage rate bait and switch

These scams are not really new and not necessarily illegal, but they are considered unethical. They are likely to be more frequent in a market where more loan officers are vying for fewer mortgages in a market with very little refinance business.

In most cases, bait and switch scams are accompanied by high pressure sales tactics to get you to stop shopping around for a mortgage. You are likely to get multiple calls at all hours of the night and day as the loan officers try to get you to use their services over someone else.

You may also get an initial loan estimate that has much higher fees and rates than other lenders you’ve received, only to be told they’ll match any rate or cost quote you receive in writing from a competitor. If you’ve experienced any of these tactics from a loan officer you’re speaking to, it might be best to cross them off your list of potential lenders to work with.

Quoting a best case rate

A lender may advertise a rate that assumes their future customer has a very high credit score, a very high down payment, and a large loan amount (usually $250,000 or more). It may also be a “buy-down” rate, costing thousands of dollars in points and origination fees, an adjustable rate, or even a short term rate like a 10-year or 15-year mortgage.

Rates vary by state, so national lenders may quote an interest rate that is only available in particular area of the country. Most quotes also assumes you are buying a single family residence that you will live in as your primary residence, so if you’re buying a condo or a manufactured home, the price quote will not be accurate.

Here are a few warning signs and steps you can take to avoid falling victim to this scam.

#1  Understand that fewer questions may equal surprises later

If you aren’t being asked very many questions about your income, credit or the type of property you’re looking at when you’re shopping around for a mortgage, chances are pretty good the final rate quote will differ significantly down the road. All lenders have “loan level price adjustments,” which means FICO scores, down payments, debt-to-income ratios and the type of property can all increase the costs and final interest rate that is applicable to your rate.

#2  If it sounds better than everybody else’s rate, ask for a written lock in agreement

Just like everything else in real estate, nothing is legally binding until it’s in writing. If a lender is quoting what looks like an outstanding rate that obliterates the competition, the best way to verify if it’s the real deal is to ask for the rate to be locked and get written confirmation.

The classic sign of a bait and switch will be a somber phone call from an apologetic loan officer informing you of a sudden change in the market, or that an underwriter needs to review your package before it can be locked. If they can’t deliver the price they first quoted, chances are you’re in store for more changes and excuses as to why the final rate and fees end up higher.

#3  Watch for an upfront non-refundable fee for locking in

Lenders are not allowed to charge you a fee to provide a price quote, but once you give them the OK to proceed with the loan, they can charge you an application or processing fee. Although it’s not uncommon to pay upfront for a credit report and appraisal, an application fee or non-refundable processing fee may be a red flag of a pending bait-and-switch.

The basic idea is you won’t want to switch companies if you’ve already got some upfront money into the transaction, and will reluctantly stick with the lender, not wanting to start over and risk not closing on time, or missing a lock expiration.

#4  Be suspicious if the lender tells you don’t qualify for the original program you were quoted for

An investor may have unexpectedly exited the market, or suddenly changed their guidelines and the best pricing requires a higher minimum loan amount. Those are just a few more reasons a lender may notify you of a switch to a higher priced loan, after baiting you with a cheaper one.

Some other common mortgage scams and how to avoid them

Despite the number of warnings and articles written about the following mortgage scams, many people still fall victim to different spins on them.

A common one involves scammers presenting themselves as “alternative lenders.” They often advertise to people with poor credit, with the false hope that their specialized loan programs will allow them to get pre-approved for loans the “big banks” can’t provide. In many cases, they are simply fishing for big upfront fees, or in the worst cases, they are identity theft rings looking to open new credit and deplete what remaining resources their victims already have.

The table below lists some more of the most common mortgage scams, who the fraudsters focus on, the basics of how they work, and quick tips to avoid them.

Mortgage scam typeWho it targetsHow it worksHow to avoid it
Reverse mortgage repair scamCurrent or future homeowners 62 and olderContractor creates urgency to do work, and recommends or teams with a loan officer who recommends a reverse mortgageGet second opinions about any proposed work, and shop for your own mortgage company
Reverse mortgage property flip scamCurrent or future homeowners 62 and olderRealtor and/or lender convince senior to buy a fix-up property using reverse mortgageJust say no. This is not something reverse mortgages were designed for
Reverse mortgage market investment scamCurrent or future homeowners 62 and olderFinancial planner recommends taking out equity in lump sum to invest in marketJust say no. Cash should be used for home repairs, living expenses or to cover unexpected medical expenses
Home improvement scamsDistressed homeowners with homes that have deferred maintenance (infrastructure repairs that been postponed due to budget concerns)Contractor comes to your home with a free quote for repairs, and then recommends major renovationsYou should initiate any requests for repair estimates from a reputable licensed contractor
Foreclosure rescueAnyone having trouble making paymentsAttorney’s office or company solicits home rescue options for an upfront feeNever, ever pay an upfront fee for any foreclosure rescue service. Your current mortgage company and local non-profit agencies will do this for free
Transfer of mortgage servicing scamsAnyone with a current mortgageA company calls or send something in the mail indicating your mortgage payments are to be made to a new companyAlways call your current mortgage company, using your current mortgage statement to verify contact information for any transfer of servicing notices.
Government endorsed loan program scamsAnyone looking for a mortgage or who currently has onePop-up ads, phone calls, or website ads talking about government, current President of U.S., or other federally endorsed loan programsIgnore the ads. Government loan programs are provided by licensed mortgage lenders. Verify the license of the company and their contact information through the Consumer NMLS link.
VA interest rate reduction churningAny veteran with a current VA loanCompanies encourage repeated interest rate reductions of VA loansVeterans should demand a cost break-even, and get a second opinion for any refinance they are pursuing.

How to keep from committing mortgage fraud

Now that we’ve talked about fraud targeting consumers, now it’s time to address the flip side. According to a recent report from Corelogic, the biggest increases in mortgage fraud on loan applications relate to buyer misrepresentations of occupancy and income. That means more consumers, perhaps with the influence or coaching of a housing professional, are lying about whether or not they plan to live in a house as a primary residence, or are making up the income being used to qualify for mortgages.

Primary occupancy fraud

The most common reason for committing occupancy fraud is so a borrower only has to make a minimum down payment. FHA loans and VA loans allow down payments of 3.5% and 0%, respectively, but they also require the property be a primary residence.

Investment properties and second home purchases require higher down payments at higher interest rates with more closing costs. Perpetrators of occupancy fraud on government loans may not realize that lenders reserve the right to conduct occupancy inspections for up to 12 months after a government loan is made.

If the inspector shows up and someone other than the original borrower is residing there, the next knock on the door could come from an FBI fraud investigator.

Reverse occupancy fraud

This is a relatively new phenomenon characterized by buyers with large down payments who say they’re buying an investment property, but turn around and live in them as primary residences. This scheme takes advantage of the fact that current lending guidelines allow market rent on an investment property to be used as qualifying income, even if there is no current tenant or lease on the property being purchased.

This is most frequently found in high rent cities like New York City, where houses have appreciated quickly and market rents are very high, creating much higher qualifying income than would be found in suburban areas of the country.

Income fraud

Income fraud schemes can be as simple as getting an employer to provide a bonus at an opportune time, or manufacturing tax documents and paystubs.The latter comes with enormous risk, considering tax records at most lenders will be matched against what is filed in the IRS database.

Lenders employ entire staffs of quality assurance personnel and use third-party fraud detection companies to track irregularities in income. According to Corelogic, income fraud risk rose 22% in the second quarter of 2018, most likely due to borrowers feeling squeezed by increasing prices and higher interest rates.

Undisclosed liabilities fraud

Credit reports make this relatively unlikely, but some examples of this are not disclosing a property owned because it has no mortgages on it, or child support or alimony that is not court ordered. Not disclosing something on a loan application is considered “fraud by omission,” and is considered just as serious as intentional fraud.

Final thoughts about mortgage scams

In the aftermath of the housing meltdown, federal and state laws were passed to more severely punish anyone committing mortgage fraud. The ripple effects of mortgage fraud are felt by entire families, neighborhoods and communities for years, and sometimes the damage is permanent.

The current penalty for mortgage fraud is up to 30 years in prison and up to $1 million in fines — it’s just not worth it.

If you believe you’ve been a victim of a mortgage scam, or feel like you are being pressured into participating in any type of mortgage fraud by a housing professional, family member or friend, you can contact the following regulators for guidance:U.S. Department of the Treasury Financial Crimes Enforcement Network: Provides a list of regulatory agencies to contact regarding all types of fraud and complaints, including mortgage fraud.

FDIC: Has valuable information tips and a guide to what to look for with foreclosure rescue, modification and mortgage delinquency scams.

USA.gov: Provides for avoiding moving scams, including how not to get taken advantage of by moving companies, which may come in handy for first time home-buyers.

The Department of Housing and Urban Development (HUD): This link provides contact information for a network of non-profit housing counselors all of the country who can provide objective, non-sales driven opinions about any mortgage scam or fraud concern you might have.

This article contains links to LendingTree, our parent company.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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