Mortgage underwriters count life insurance as an asset for your mortgage application if the policy has a cash value that exceeds the surrender cost. Generally, permanent life insurance products -- including whole, variable and universal life insurance -- contain a cash value. A term life policy does not have a cash value that is considered an asset by underwriters.
Cash Value and Face Value
Permanent life insurance includes a face amount, which is the death benefit that is paid out when the policyholder dies. The policy also accumulates a cash value that continues to grow during the policyholder's lifetime. This cash value can be borrowed against, used to pay premiums or passed on to others after the policy owner's death. Term life products, which are less expensive, only have a face value, but not a cash value. A term life policy lasts for a preset period of years, while a permanent life policy lasts until you die or cancel the policy.
Cash Value and Surrender Charge
Typically, a life insurance company charges you a surrender fee when you cancel a permanent life insurance policy. This pays the insurer back for their costs in the early years of the policy while your premium payments are building up a cash value. The charge also encourages policyholders to keep their life insurance and not cancel early. The surrender fee is normally a percentage of the cash value of the insurance policy. Mortgage lenders only consider the cash value of your policy less the surrender charge, since the fee is subtracted from the cash value of your life insurance if you cash out the policy or cancel it early.
Down Payment, Closing Costs, Reserves
When mortgage lenders underwrite a mortgage, they examine your assets to decide if you are creditworthy and financially sound enough to purchase a house. In order to satisfy the underwriters, you need sufficient liquid assets (assets that can be turned into cash quickly) to indicate that you can pay the required down payment, closing costs and financial reserves. If you are surrendering the policy to use the proceeds for the down payment, closing costs or financial reserves, the lender allows either the loan value or the cash value of your policy, less the surrender charge. To verify the loan terms or cash value of the policy once it is surrendered, the underwriter requires documentation directly from the insurance company.
Cash Value Loans
If you qualify for the mortgage, by getting a loan against the cash value of your life insurance, the loan payments do not count as long-term debt if the repayment penalty is equal to or less than the surrender value. However, the lender will qualify you for the mortgage based on factoring the payments into your debt-to-income ratio or by subtracting them from your financial reserves if the penalty exceeds the surrender value or any additional fees apply.
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