CAL VET: What is it? Should You Apply for a Loan Here? Advantages and Disadvantages of Cal Vet vs. a Traditional VA Home Loan

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1 CAL VET: What is it? Should You Apply for a Loan Here? Advantages and Disadvantages of Cal Vet vs. a Traditional VA Home Loan From the Book, What Every Veteran Needs to Know by Peter Van Brady People often call SoCalVAHomes inquiring about the Cal Vet loan, wondering if it might be a good fit for them. Our answer is it might be (if they are active military or veterans and a California resident). Like any loan, there are both advantages and disadvantages. In this author s opinion, in a few isolated circumstances, a Cal Vet loan may be preferable to a traditional VA Home Loan. I ll compare and contrast here. Loan Limits: A big advantage of the Cal Vet loan, would be the loan limit. As of this writing, Cal Vet loans go as high as $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, wherein loans with limits much higher than $417,000 are available. A few years ago, in Alameda, Marin, etc., the VA was actually approving 100% financing in these counties up to a million dollars. So in those counties where high-cost loan limits exist, traditional VA financing is most likely your best bet. Let's say 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. The VA is going to ask that you cover that 25% guarantee or contribute 25% of the difference between the purchase price and the VA loan limit, which is often $417,000. If the difference is small, you may want to 1

2 stick with a traditional VA home loan. But if you just absolutely have to have 100% financing, then Cal Vet might be an option for you because of that higher loan limit of $521,250. Credit Standards: An additional advantage of Cal Vet: This loan is more accepting of a lower type of credit profile). In Cal Vet s case, all of the underwriting is done old-school, via manual underwriting. Manual underwriting can be a good thing when a human (not a computer initially reviewing your file) is instructed to be more flexible or lenient when considering derogatory credit. Unfortunately manual underwriting can also work to your disadvantage. Let me explain. If you have had bankruptcies, foreclosures and or lots of collection accounts & chargeoffs, but you are now financially resurrected and you think you can certainly repay the loan, then Cal Vet's manual underwriting strategy may suit your needs. Cal Vet is not credit-score-driven, per se, and that can be an advantage. So for those borrowers who are at the very lowest end of the credit profile spectrum, Cal Vet may be an advantage. It s hard to say without first attempting a traditional VA loan application which also accepts manual underwriting scenarios. Traditional VA financing with manual underwriting may accept credit scores as low as 580 or even lower, but the funding source will price the default risk accordingly. Considering Cal Vet has one price to fit all borrowers, it s my opinion, that Cal Vet is more of a last resort option when considering credit. Mobile Homes: If you wish to buy a mobile home, Cal Vet will do the financing on mobile homes. The home has to be the in mobile home park where you're renting the space, and that's not a real estate loan, that's a consumer loan. In the regular world of real estate lending, that financing doesn't exist because a mobile home is not a fixed foundation, so for people who are looking for that type of residential living, that s a real obvious advantage of Cal Vet. Last time I reviewed, 2

3 you have 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: For each one of their programs, (try a Google search to learn about Cal Vet s programs and eligibility) they will charge a 1% origination fee. So an immediate price comparison will reveal the price of the Cal Vet loan as appearing to be more expensive. That's the only fee. In the typical VA financing, that 1% origination fee can easily disappear. With Cal Vet, the money to lend is created from selling bonds up front, at a particular rate. When those funds exhaust themselves, the program sells a new set of bonds in the same manner, likely at a different rate as market forces dictate. Cal Vet has more than one program. Let's say there is one hundred million dollars available to lend for one Cal Vet program and a hundred million dollars for another Cal Vet program. The rates on these programs for money available to lend for mortgages go up and down. And in most environments, those rates are going to be higher than typical VA rates. Right now the programs, as I write this in the spring of 2015, those Cal Vet rates are at a disadvantage. They are certainly higher than national VA rates - rates available in VA programs that are funded on a national basis. Ability or Cal Vet s INABILITY to absorb Closing Costs: As I write this, we are in a seller's market right now. Due to The Great Recession, California has the lowest inventory of homes available for sale in the state in fifteen years. In the season of , all the first-time buyers came out of the woodwork at the same time, and investors bid up prices, and the result was that there just weren't any homes for sale. It is a very tight market. And in tight markets, sellers are not inclined to give you any concessions for closing costs. They say, Here's the property, pay for it at this particular price, but without a credit towards closing costs or repairs or anything else. Take it or that next guy will later today! 3

4 Here's where it gets really, really difficult with Cal Vet. If Cal Vet's the only thing that works for you, great. But 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 believe me! And in that VA no-no scenario closing costs are 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. So who has to pay for them? You, the buyer OR the lender. 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 Cal Vet? 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 it! The seller's not going to pay for it, you don't have any money, Cal Vet won t pay for it and so you are out of luck. Traditional VA financing has interest rate options. When you consider a higher rate (very common) the lender pays for all of those costs. But in our mature loan marketplace, (thanks to Lewis Ranieri of Solomon Brothers, who in 1977 created the advent of mortgage-backed securities), today there is a spectrum of interest rates available in the marketplace. The lowest rates, where you pay points are very costly, and the highest rates, where the lender pays YOU ( points ) have funds available for closing costs. At the higher rates, premium pricing is available! What that means is, let's say you have an interest rate range between 3.25% and 4.25% (and for those of you who are reading this beyond 2015, perhaps rates have gone up!) That interest rate spectrum allows the lender to literally, at the highest rate or the higher end of the rate spectrum, inject cash into the transaction, to pay for all these closing costs: underwriting, title, appraisal, escrow, funding the new impound account, (which is putting months of property tax liabilities and home owner s insurance into an escrow impound account.) Again, we use that premium pricing at, say a rate of 4.25%, to pay for the ALL the closing costs, which could easily add up to more than $10,000.00! That's how costs typically get paid for in a VA purchase transaction. At the higher end of the rate spectrum, there's all this money that's extra ; it's available to devote to the closing costs because you, as the consumer, made an educated decision to choose the higher rate. 4

5 Of course the opposite choice is also always available. Thinks 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 to, say, 3.25%. Hopefully whoever you're talking to arrange your financing presents these valuable options to you, because of course, you have choices. So from that pricing perspective, Cal Vet becomes a big disadvantage and traditional VA financing is a huge advantage in terms of buying a home using your VA benefit. We hope you use this information to guide you to the best decision for you and that you succeed in becoming a homeowner. If you are interested in more information on the CA Vet loan or how traditional VA financing can help you buy a home, call SoCalVAHomes at Copyright 2015 by Peter Van L. Brady All rights reserved. 5

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