With interest rates rising, veteran homebuyers are combing through assistance programs for the best deal. Does the CalVet program provide a good value for veterans?
Many assistance programs help veterans realize the dream of owning a home. Although its terms seem favorable at first glance, one such program by the California Department of Veteran Affairs (CalVet) falls short when compared to other available mortgage programs for veterans.
How does CalVet work?
Mortgage companies partner with CalVet to originate mortgages directly to veterans. This program is funded by the sale of California state general obligation bonds. Learn more about CalVet’s funding sources here.
CalVet offers mortgages to qualified veterans to:
- purchase a farm, home, condominium or mobilehome; or
- construct a home. [Calif. Military and Veterans Code §987.53(a), (b)]
All CalVet contracts of purchase have been issued with fixed interest rates since 2011, according to a report of independent auditors. Their fixed-rate mortgages (FRM) offer competitive interest rates, low monthly payments and flexible credit standards when compared to conventional financing or mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the U.S. Department of Veterans Affairs (VA).
Eligible applicants need to apply within 25 years of release from active duty, and include:
- veterans who served in active duty for at least 90 days [M & V C §980(a)(5)];
- veterans who served under honorable conditions [M & V C §980(a)(3)];
- California residents who served and were honorably discharged or honorably released from active duty during a qualifying war period [M & V C §980(a)(2)]; and
- un-remarried spouses of veterans who lived in California for six months prior to entering active military duty 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)]
Note that applicants don’t need to have lived in California before entering active duty. [M & V C §980]
CalVet at second glance
Veterans searching for a home in California may be tempted by CalVet’s interest rates considering mortgage rates are expected to continue rising over the long term. This trend has discouraged homebuyers and decreased their purchasing power. As a result, veteran homebuyers may be prioritizing interest rates in their search and discounting other factors entirely.
One such factor to consider is CalVet’s restrictions against the veteran’s rights of possession. As part of their mortgage program, CalVet purchases the veteran’s desired property and sells it to them using a land sales contract. [M & V C §987.60]
This mortgage financing arrangement is often also used to avoid the appearance of charging interest. In this arrangement, CalVet holds legal title to the property while the buyer only holds equitable title. [M & V C §987.60(a)(3)(A)]
Keep in mind that because CalVet is a purchase-only program, a homeowner cannot take out a home equity loan or consolidate debt. Although property values are only expected to rise meagerly in 2019, CalVet borrowers will not be able to take advantage of their property’s growing value.
Finding an alternative
Considering the CalVet program’s problematic financing instrument and restrictions, real estate agents need to explore other options for their clients before signing up.
A good place to start is the VA. VA-guaranteed mortgages:
- have no down payment requirements (the standard CalVet product requires a 3% down payment);
- cap origination fees at 1% (CalVet requires a 1% origination fee); and
- allow 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)]
Because VA-guaranteed mortgages are not limited in the same way the CalVet purchase-only program is, they edge out CalVet mortgages by:
- immediately granting the buyer full legal title to and ownership of the property;
- allowing refinancing;
- allowing debt consolidation; and
- allowing home equity loans.
VA mortgages are not without their disadvantages. For one, a veteran buying a mobilehome in California may be better off starting their search with CalVet. This is because CalVet finances mobilehomes located in parks, which are traditionally difficult to finance and often have higher interest rates.
In most other cases, the benefits of a VA-guaranteed mortgage leave little room for both programs as they practically make CalVet mortgages redundant.
Note that a veteran can refinance out of a CalVet mortgage into a non-CalVet mortgage if they’re not happy with it – and pay the attendant fees associated with any refinance. A little research ahead of time helps to avoid sinking money into fixing an undesirable situation down the road.
Agents — Have you recommended CalVet to your veteran clients? Describe your experiences with the program in the comments below.