Chapter 14: Gold Mine or Coal Mine? The CalVet Loan
Advantages and Disadvantages of a CalVet loan vs. a Traditional VA Home Loan
People often call So Cal VA Homes inquiring about the CalVet loan, wondering if it might be a good fit for them. Our answer is it might be (if they are active military or a Veteran and a California resident). Like any loan, there are both advantages and disadvantages. In a few isolated circumstances, a CalVet loan may be preferable to a traditional VA Home Loan. In this chapter, we will compare and contrast their features and benefits.
A big advantage of the CalVet loan may be the loan limit, depending on the amount of your financing needs. In 2015, CalVet loans had a loan limit of $521,250. That's significantly higher than the VA conforming loan limit of $417,000 throughout the state. California has a lot of “high-cost” communities where the county loan limit has been much higher than $417,000. A few years ago, in Alameda, Marin, and other select counties, the Department of Veterans Affairs, not CalVet, was actually approving 100% financing in these counties up to a million dollars. In the counties where high-cost loan limits don’t exist, CalVet financing may be an advantage to the extent that your purchase needs 100% financing.
If you are purchasing a home in a county that does not have a high-cost limit (the loan limit is $417,000), and you want to buy a more expensive property, a “small” down payment will be required for a traditional VA home loan. The VA is going to ask that you cover that 25% guaranty or contribute 25% of the difference between the purchase price and the VA loan limit, which is $417,000 in counties without the high-cost designation. If the difference is small, you may want to find a way to come up with the extra cash and choose a traditional VA home loan. But if you just absolutely have to have 100% financing, then CalVet might be an option for you because of that higher loan limit of $521,250.
The CalVet loan is also advantageous because it is more lenient on those borrowers who have had credit troubles. In CalVet’s case, all of the underwriting is done “old-school,” via manual underwriting. Manual underwriting is when a human (not a computer) initially reviews your loan application. With CalVet, underwriters are instructed to be more flexible when considering derogatory credit.
However, manual underwriting can also work to your advantage with a traditional VA underwriter. Traditional VA financing with manual underwriting may accept credit scores as low as 580 or even lower, but the lender will adjust the “price” of the loan (the interest rate and points) to accordingly reflect the greater default risk associated with the lower scores. Considering CalVet has one “price” to fit all borrowers, it’s my opinion, that CalVet is more of a last resort option when considering credit. CalVet rates and fees are a comparative disadvantage.
If you have had bankruptcies, foreclosures and/or lots of collection accounts and charge-offs, but you are now financially stable, CalVet's manual underwriting strategy may suit your needs. CalVet is not “credit-score-driven,” per se, and that can be an advantage. For those borrowers who are at the very lowest end of the credit spectrum, CalVet may be your only option. Our advice is to explore all traditional VA financing options first before inquiring about a CalVet loan.
If you wish to buy a mobile home, then CalVet will perform financing on mobile homes when you intend to rent the space to place the home on. These spaces are commonly in mobile home parks. These are not considered real estate loans. These are consumer loans because there is no “real property.” In this case, you can load the home on a trailer and drive it away. That’s not considered “real estate,” or real property. In the typical world of real estate lending, that type of consumer financing doesn't exist because the mobile home is not on a fixed foundation; it’s not attached to the earth! If you are looking for that type of residential living, CalVet presents an obvious advantage. In 2015, CalVet required a down payment. A 6-1/2% down payment would allow purchase prices up to $175,000. That’s a lot of buying power for a mobile home purchase.
Rates/Loan Pricing – the Most Critical Comparison
In 2015, CalVet’s charged a 1% origination fee, without exception. That fee on 1.00% of the loan balance needs to be paid to CalVet before closing. Therefore, an immediate price comparison would reveal the price of the CalVet loan as appearing to be more expensive. That's the only fee they charge. In typical VA financing, that 1% origination fee can easily disappear. Understanding “loan pricing,” and how that 1.00% disappears is very valuable. There is a big difference in the mechanics of the moving parts of where CalVet gets its money to lend vs. where the funds come from when a traditional VA lender makes a loan to you.
With CalVet, the money to lend is created from selling “California bonds” to investors before you apply for a loan. The investors are promised a specific yield or rate of return on their investment based on current market conditions. When those funds raised from investors are exhausted, the program sells a new block of bonds in the same manner, likely at a different rate as market forces dictate. CalVet has more than one program. Let's imagine there are one hundred million dollars available to lend for one CalVet program and a hundred million dollars for another CalVet program. The interest rates on these mortgage programs go up and down as funds are loaned to borrowers and then new rounds of bonds are sold to investors. And in most interest rate environments, the CalVet rates are going to be higher than typical VA rates.
The CalVet system and “cycle” of raising funds, then lending those funds appear archaic as compared to the “real-time” functioning of traditional mortgage banking. The system that traditional lenders use when selling VA loans “to the secondary market” or “GNMA” is far more efficient and responsive to the daily change in interest rates. This traditional system typically creates lower rates with expanded choices for different interest rates. And those choices can create advantages when addressing your closing costs.
CalVet’s inability to absorb closing costs
In 2015, it was a “seller's” market. Due to The Great Recession of 2011, California had the lowest inventory of homes available for sale in the Golden State in fifteen years. In the years 2011-2013, all the first-time buyers came out of the woodwork at the same time. The renewed buyer demand and investors both helped to bid up prices. The result was that there weren't many homes for sale! It was a very tight market. And in tight markets, sellers are not inclined to give buyers any concessions for closing costs. The attitude is, “Here's the property as-is. Buy it at this full list price or higher or get out of the way of the next ten offers! We’re not giving away any credit towards closing costs or repairs or anything else!”
Here's when it gets really, really difficult with CalVet. If CalVet is the only option that will work for you, then be prepared to pay your own closing costs. When constructing what's described in the industry as a "VA no-no", a no-money-down-no-closing-costs purchase, the closing costs do exist and have to be paid somehow. And in that “VA no-no” scenario, closing costs will be paid for by one of two parties: the seller or the lender. In a tight market, the seller is NOT going to pay for them, and these costs can be substantial.
If you don't have any money and the seller is not going to pay for the closing costs, who’s going to pay the 1% origination fee charged by CalVet? Who’s going to pay for the appraisal, title, and escrow fees? Who’s going to contribute the funds to the new “impound account,” to budget for taxes and insurance? Someone's got to pay for all this! The seller's not going to pay for it, you don't have any money, and CalVet won’t pay for it, so you are out of luck. With traditional VA financing, interest rate choices should exist to solve this problem. It’s very common for VA borrowers to consider a higher interest rate option (than the lowest rates offered) where the lender pays for all of the closing costs. These options are a function of a complex capital market for mortgages.
In 1977, Lewis Ranieri of Solomon Brothers created the advent of “mortgage-backed securities.” As a result, today there is a spectrum of interest rates available in the mortgage marketplace. The lowest rates, where you pay “points,” are very costly. With the highest rate choices, the lender contributes funds available for closing costs. For an expanded discussion of how this works, please refer to the chapter on VA IRRRLs.
Imagine interest rates offered in a range between 3.25% and 4.25%. That interest rate spectrum allows you choices. At the highest rate of 4.25%, the lender can inject cash into the transaction to pay for all the closing costs including underwriting, title, appraisal, escrow, funding the new impound account, (months of property tax liabilities and home owner’s insurance.) This can be very advantageous because closing costs can easily add up to more than $10,000.00. This is the mechanism of how costs typically get paid for in a VA purchase transaction.
Of course, the opposite choice is also always available. Think of this choice as "buying points" or a "buy-down" as it commonly referred to. You (or the seller) contribute funds to buy down the rate in this case to 3.25%. Hopefully, whoever you're talking with to arrange your financing presents you with these valuable options. You do have choices.
In conclusion, from the loan “pricing” perspective or the availability of interest rate choices, Cal Vet represents a big disadvantage, whereas traditional VA financing offers choices that represent a huge advantage.
For assistance in determining which financing option is best for you, let So Cal VA Homes help. Call us at (949) 268-7742.