Cash Value Live Insurance doesn't count as an asset or reserve funds?

[coterotie]

We're getting close on our VA loan, but our loan processor says that we can't count as reserve funds the cash value of life insurance.

It is a paid up policy, with a 25,000 face value, $30,000 death benefit, $28,000 cash value and pays $1,000 per year in dividend income.

According to FNMA and VA underwriting manuals it is counted as a reserve and as available funds for closing if necessary.  This lender, (which btw has a huge life and p & c subisidiary) says it isn't an asset.

We probably don't need them, but still seems crazy that they won't count them.

[Anonymous]

Are you sure there wasn't some misunderstanding? The lender may have gotten the impression you have term life insurance, which while useful, is not an asset.

[coterotie]

I thought of this possibility, so I included the statement from the insurance company which detailed the balances etc.  Also re-iterated it was a whole life policy and sent them the pages from the FNMA manual and VA manual. 

When they initially said it didn't count asked them to go directly to the underwriter at the bank for clarification.  Everyone up the line states that Cash Value of a paid up policy isn't an asset nor is it available.  (Even though the statement itself states how much is availabe as "cash.")

[coterotie]

Shane -- any insight here?

And on a side note, they still haven't figure out how to gross up the tax free income so we're right on the border for DTI, even though using the gross up formula from the VA manual it qualifies easily.

[Laura1369]

What is the "gross up formula"? 

[ShanetheMortgageMan]

It'd be odd, but perhaps they have an overlay guideline that says cash value of life insurance can't be used.  Not sure why they'd have that, but I'd ask them to forward their specific guidelines on life insurance.  They may just be confused themselves.

The VA guidelines on grossing up income are:

Tax-free income may be “grossed up” for purposes of calculating the debt-toincome ratio only (not residual income). This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan. “Grossing up” involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the tax-exempt income. Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower’s actual income. Do not add nontaxable income to taxable income before “grossing up.”

This is the same for practically all mortgage programs.  With most situations the non taxable income is grossed up an additional 25%, so $1,000/mo = $1,250/mo.  Most common income sources are social security income & disability income.

[Laura1369]

Hmmm interesting... My only income is va disability income. Not that I want a bigger mortgage than the one I'm getting. Just curious if this was used or not.

[coterotie]

Thanks Shane.  All I get is a verbal "It don't count."  I'll ask for their specific overlay/guidelines.  We get $1,000 a year in dividends off the thing, so the income isn't insignificant either.  Just means I have to do a gift letter to transfer funds from my account to my FIL account.

As to the gross up.  The problem is they can't figure out how to enter it into Desktop Underwriter.  So it kept kicking it out as refer.  It is a difference between a 35% ratio and a 49% ratio basically.  We're still supposed to close this week.  Just a couple of nit-picking details that at first were keeping us from being able to roll the VA fee into the loan.  Got that cleared up by correcting some errors on the input side.  All of the income (about $4,000 per month) is tax-free both federal and state.

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@ShanetheMortgageMan wrote:

It'd be odd, but perhaps they have an overlay guideline that says cash value of life insurance can't be used.  Not sure why they'd have that, but I'd ask them to forward their specific guidelines on life insurance.  They may just be confused themselves.

The VA guidelines on grossing up income are:

Tax-free income may be “grossed up” for purposes of calculating the debt-toincome ratio only (not residual income). This is a tool that may be used to lower the debt ratio for veterans who clearly qualify for the loan. “Grossing up” involves adjusting the income upward to a pre-tax or gross income amount which, after deducting state and Federal income taxes, equals the tax-exempt income. Use current income tax withholding tables to determine an amount which can be prudently employed to adjust the borrower’s actual income. Do not add nontaxable income to taxable income before “grossing up.”

This is the same for practically all mortgage programs.  With most situations the non taxable income is grossed up an additional 25%, so $1,000/mo = $1,250/mo.  Most common income sources are social security income & disability income.

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[ShanetheMortgageMan]

Sounds like you have a pretty interesting lender.  I'm sure it'll be worked through.

To enter the income correctly into DU, you just enter in the grossed up amount.  DU doesn't automatically gross it up for you.

[coterotie]

Thanks, that is what I told them to do.  I even had them send me the printouts from DU and told them where the entry would be.  I think it is just a lack of familiarity with anything other than a plain vanilla FNMA.  It is an independent mortgage broker but they do 100% of their business with a local/regional bank.  They have been good about communication, the rate is I think pretty good (3.5+1), they (the bank) portfolio all their loans so I can actually go into the bank branch and make a payment if necessary or find a human being to complain to if something is screwed up.

I think the problem was the underwriter didn't know how to do it and they got worried about the numbers from DU matching the documents and couldn't figure out where to write the explanation.  I think sometimes I am ahead of the game because of this board and past experience and it confuses them.  e.g. We need to do a gift letter for about $500.  So while I was waiting for my wife to get home and sign the letter, I went ahead and sent them two months of our checking account statements and investment account statements.  Figuring if they needed to source our gift funds I would be in front of the request.  Freaked them out.  I have had documents to them before they asked or within minutes of them asking, also catching errors in things like their data input or on the appraisal,  so it has been a little disconcerting to them.

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@ShanetheMortgageMan wrote:

Sounds like you have a pretty interesting lender.  I'm sure it'll be worked through.

To enter the income correctly into DU, you just enter in the grossed up amount.  DU doesn't automatically gross it up for you.

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