CalVet provides veterans with mortgages at below market rates — but at what cost?

CalVet: What is it?

The California Department of Veterans Affairs (CalVet) mortgage program offers variable rate mortgages to qualified veterans for:

  • the purchase of a farm, home, condominium or mobilehome; and
  • the construction of a home. [Calif. Military and Veterans Code §987.53(a), (b)]

CalVet mortgages are adjustable rate mortgages (ARM) with interest rates generally below market, low monthly payments and flexible credit standards, as compared to conventional financing or mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA).

Mortgage companies certified by CalVet partner with CalVet to originate CalVet mortgages directly to veterans. Mortgages funds for the CalVet mortgage program re raised by the sale of California state general obligation bonds.

Qualifying for CalVet

CalVet mortgages are available to qualified veterans, whether or not the veteran lived in California when they entered active duty. [M & V C §980]

A veteran may qualify for CalVet if they served in active duty U.S. military, naval or air service for no less than 90 days. [M & V C §980(a)(5)]

A veteran may also qualify if they were called to and released under honorable conditions from active duty as a member of the reserves or National Guard when a presidential executive order specifies the U.S. is engaged in combat or homeland defense. [M & V C §980(a)(3)]

California residents who served and were honorably discharged, or honorably released from active duty during World Wars I and II, the Korean Conflict and the Vietnam War, and citizens on active duty during Desert Storm and Operation Desert Shield or Operation Restore Hope in Somalia, are also veterans who may qualify for a CalVet mortgage. [M & V C §980(a)(2)]

Further, a person is a qualified veteran if they served in the U.S. Merchant Marine Service and were granted veteran status by the U.S. Secretary of Defense. [M & V C §980(a)(4)]

An unremarried surviving spouse of a veteran who lived in California for six months prior to entering active military duty may qualify for a CalVet mortgage if the veteran:

  • was killed in the line of duty;
  • died after discharge from injuries incurred in the line of duty;
  • is being held as a prisoner of war; or
  • is designated as missing in action. [M & V C §987.58(b)-(c)]

When negotiating the purchase of a home, a veteran seeking a CalVet mortgage submits an application to CalVet or a direct mortgage lender certified by CalVet.

Once CalVet determines the veteran (or their surviving spouse) is eligible for a mortgage, CalVet needs to approve the home or farm the veteran is purchasing, or plans for any proposed residence to be constructed by the veteran. [M & V C §987.59]

How it works

If the veteran qualifies for a CalVet mortgage, and the property and the price the veteran agreed to pay for the property are approved, CalVet intervenes in the sales transaction by becoming the purchaser of the property in lieu of the veteran, an archaic mortgage financing arrangement often also used to avoid the appearance of charging interest.

CalVet, in a legally fictitious transaction, “resells” the property to the veteran by entering into a CalVet mortgage agreement with the veteran for the amount advanced by CalVet as purchase-assist financing. [M & V C §987.60]

CalVet holds legal title to the property as security for repayment of the loan. The veteran is the actual owner of the property, with equitable ownership. It is a title arrangement similar to a loan secured by a motor vehicle, or a sale of real estate on a land sales contract, or leasing arrangement with title conveyed to the homebuyer on expiration of the lease without further monies due. [M & V C §987.60(a)(3)(A)]

Problems with CalVet

The good thing about CalVet is that veterans receive below market interest rates on their mortgages. CalVet credit standards are also more flexible than conventional financing credit standards.

However, the good doesn’t cancel out the bad. The downsides of CalVet financing are:

  • the mortgage’s adjustable rate make the mortgage payment unreliable for the homeowner;
  • the structure of the mortgage is the same as a land sales contract, with title vested in the name of CalVet — not the veteran homebuyer; and
  • compared to FHA-insured and VA-guaranteed mortgages, CalVet mortgages are more restrictive against the veteran’s rights of possession and equity financing arrangement.

The CalVet program is also somewhat redundant. Veterans already have the option of applying for a VA-guaranteed mortgage which:

  • is fixed over the life of the mortgage (CalVet mortgages are ARMs);
  • has zero down payment requirements (the standard CalVet mortgage requires a 3% down payment, or a veteran can use their VA entitlement to obtain a zero down payment mortgage);
  • requires no origination fee (CalVet requires a 1% origination fee); and
  • allows the homeowner to continue to own their residence even if they relocate (CalVet requires the homeowner to live in the residence through the life of the mortgage). [M & V C §987.60(a)(2)]

Simply put, taking out a CalVet mortgage makes little sense when a veteran has the option to take out a VA-guaranteed mortgage.

California real estate agents — What has been your experience with the CalVet mortgage program? Do you recommend CalVet over VA-guaranteed mortgages, or vice-versa?