CalVet vs VA Loan : What is the Difference?

What is the difference between the CalVet home loan program and a standard VA loan? Is one program better for California Veterans? Is it easier to qualify for VA or CalVet? These are all common questions from Veterans living in California. Many Veterans are not familiar with the CalVet program, but those that are sometimes automatically assume the CalVet home loan program must be better. But it depends on the situation. For most California Veterans, the standard VA loan program will be the best option. But there are times when the CalVet program can get things done that VA cannot.

Veterans in California have two great home loan programs to choose from- the CalVet home loan program and the VA loan program. Both programs offer Veterans low interest rates, no down payment, and relaxed qualification standards. But there are some key differences between the two programs that you should be aware of before you decide which one is right for you. In this blog post, we will compare and contrast the CalVet and VA home loan programs so that you can make an informed decision about which program is best for you.

Differences between the CalVet and VA Loan Programs

The first difference is the CalVet home loan program is offered by the California Department of Veteran Affairs. The VA loan program is guaranteed through the Department of Veterans Affairs, but it is actually offered and funded by banks and mortgage banks.  The funding for CalVet comes from the selling of voter approved Bonds. The funding for VA loans comes from Ginnie Mae Mortgage Backed Securities. CalVet posts an interest rate for each of their programs, whereas there is not a set interest rate with VA. VA interest rates can vary from one lender to the next, although should still be within a certain range based on how Ginnie Mae Mortgage Backed Securities are doing.  

va interest rate

This leads to a big difference for California Veterans. CalVet charges a 1% Origination Fee on it's program. There are no underwriting or processing fees, but 1% can be a hefty fee in some markets. For example, a 1% Fee on a $500,000 loan is $5,000. VA offers more flexibility with loan pricing. A California VA lender can quite often offer loan options with 0 points (on a standard VA loan) or even negative points/a lender credit to offset other closing costs.  If a Veteran is needing to limit or even eliminate funds to close, VA will offer more flexibility since the lender is not locked into offering only one interest rate option and charging the 1% Origination Fee.

A big difference between these two programs is how title is held by the Veteran. CalVet holds legal title to the home. CalVet uses a "contract of sale" for the home purchase. Essentially, the California Veteran identifies the property, makes the offer, and gets it under contract. A Contract of Sale is also know as a Land Contract. The Veteran holds "Equitable Title" , which means they have the right to eventually have full ownership of the home. CalVet holds legal title. With a VA loan, the California Veteran immediately receives full legal title and ownership, just like nearly all other loan program types. A Veteran using a standard VA loan can get a HELOC or refinance to pull cash out. CalVet does not allow for a 2nd mortgage and does not do refinances. For this reason, many CalVet borrowers eventually refinance into a VA loan if rates drop or if property values increase and they want to access their equity.

Similarities Between CalVet and VA

Just like VA, CalVet does use the Veterans VA Entitlement on many of its loan program. A Certificate of Eligibility will be retrieved to confirm eligibility. CalVet has program's that allow for 100% financing, but also have programs for some Veterans who may not have VA eligibility. 

Which is Better: CalVet or VA?

There is no "right" answer for all Veterans. It's worth it to check into both programs. If a Veteran is purchasing a mobile home on leased land the CalVet is the way to go. If a Veteran is not eligible for a VA loan then they should check into CalVet. If a California Veteran is purchasing a farm, then check with CalVet. But if a California Veteran is looking to purchase a Single Family home or condo, or a 1 to 4 unit property they plan to live in, then check into both programs. 

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Arbor Financial Group NMLS 236669. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process

VA Loan Closing Costs in California: What to Expect

Veterans are sometimes caught off guard when they learn about the closing costs associated with a home purchase. While it is true that VA does not require a down payment, closing costs are still a thing when buying a home no matter what type of loan the buyer is using. In a survey done by ClosingCorp, 17% of buyers were surprised closing costs were required on a purchase and another 35% were surprised at how much the closing costs were for their home purchase. The total costs to purchase a home can be anywhere from 2% to 5% of the purchase price. Being prepared and knowing the numbers is very important for any Veteran looking to purchase a home with a VA loan. There are two main types of closing costs/fees to be aware of. Non-recurring and Recurring closing costs.

Non-Recurring Closing Cost

As the name implies, Non-Recurring Closing Costs include items that only occur during the actual transaction. For example, an appraisal is needed for the purchase, but will not be needed on an ongoing basis unless the borrower is looking to do another transaction or refinance the loan. Non-Recurring Closing costs include fees for the loan, property inspections, title and escrow fees, etc. Below is a list of fees that you may see on a California home purchase.

  • Appraisal - VA sets the Fee for an appraisal. In California it can range between $700 and $1,000 depending on the county the property is located. The VA appraisal cost in Orange County and Los Angeles County is $700. The California VA lender will order the appraisal.
  • Credit report - the VA lender will pull your credit. The credit report is a "Tri-Merge" report which included the FICO scores from all three bureaus which include Experian, Equifax, and Transunion. The cost of the report and any additional updates to the report and passed on to the buyer. The lender does not make a profit on credit reports (or appraisals). The credit report fees can range from $50 to $100. Some lenders include the cost of the credit report in their Origination Fee.
  • Origination Fee - this is charged by the lender. It can range from $500 to 1% of your VA loan amount. The Origination Fee on a VA loan cannot be more than 1% of the loan amount. The Origination Fee covers lender costs to Process, Underwrite, and close the loan. Some lenders automatically charge 1% on all VA loans. For example, CalVet charges 1% on all CalVet loans. It is important to understand the difference between the Origination Fee and Discount Points.
  • Discount Points - Discount Points are using the "buy" the interest rate down. Many VA borrowers don't realize it, but VA does not lend and does not have one "rate". Interest rates are formulated based on how Ginnie Mae Mortgage Backed Securities are trading on the secondary market. All lenders are starting from the same point when it comes to pricing a loan so there should be too much of a difference in rates from one lender to the next. But in some situations there is a big difference, so its important to know that just because one lender quotes a certain rate doesn't mean all lenders will quote the exact same rate and fees. When a California VA Loan Officer quotes an interest rate they are looking at a matrix of rates. The lower the interest rate the more the Discount Points to get that rate, The higher the interest rate, the lower the Discount Points or cost will be. It is quite often possible to accept a rate that is higher than the current market in order to get an offsetting lender credit to cover some or all of the closing costs. There are strategies here that a good VA Loan Officer can present to you.
  • Escrow Fee - this fee is charged by an Escrow Company. The escrow company is a neutral third party in the transaction whose primary role is to protect the interests of all parties involved in the sale, including the buyer, seller, buyers agent and the sellers agent. The escrow company handles the funds between the buyer and seller, making sure the buyer doesn't receive title to the property until all conditions of the purchase are met and making sure the seller doesn't receive funds from the sale until those same conditions are met. The escrow fee can range from $500 to several thousand dollars. Most escrow companies use a formula to determine the cost. For example, they may have a base fee of $500 plus $3 per $1,000 of price. So a $500,000 purchase price would have an escrow fee of $2,000 using this formula. The escrow fee is considered by VA to be a "non-allowable" fee. This just means that the escrow fee, combined with the Origination Fee and other Non-Allowable fees can't be more than 1% of the loan amount. The escrow company it typically chosen by the seller or sellers agent.
  • Title Insurance - this protects the lender and the borrower from financial loss from defects on title. Title insurance is quite often an afterthought, but there have been nightmare stories in Mexico where a home is bought with no title insurance, only to find after closing that the property was improperly deeded to the seller 20 years prior. The buyer in that case would lose the property and the money they used to buy it. Fortunately, the US has title insurance and any home buyer using financing will have it. Fees for title insurance range from $500 to $3,500 depending on the sales price of the home. The title insurance company is typically chosen by the seller or sellers agent.
  • Inspection fees - these include the termite inspection, Home inspection, and in some cases the well inspection, septic inspection, etc. In California you will always have a termite inspection. And while a Home Inspection is not required by VA, it is highly recommended. A termite inspection is typically in the $125 range. Repairs required by the termite inspection are typically paid by the seller but everything is negotiable. The Home Inspection can cost between $400 and $1,000 depending on the property. 
  • Recording Fee - fee paid to the county recorder for the recording of the Grant Deed and Deed of Trust.
  • Home Warranty - this is not required by the lender but is recommended. The home warranty covers things that go wrong with the home in the first 12 months after the purchase. Not all Home Warranty's are the same so it's important to do some research. But they will typically cover things like plumbing, appliances, etc. 
  • HOA transfer fee - If the home is a Condo or in a Planned Unit Development (PUD) then there will be a Home Owners Association. Most HOA management companies will charge a transfer fee when a home sells.
va home buyer

Recurring Costs - AKA Prepaid Expenses

Recurring costs are also know as Prepaid Expenses. These are expenses/costs that will continue after the closing of the purchase. For examples, there will be a fee for the annual Home Owners Insurance premium. This fee will be ongoing for as long as the home is owned. There are several Recurring Costs.

  • Homeowners Insurance Premium - the buyer will prepay for the first 12 months. The Homeowners Insurance protects the homeowner if the home is damaged by fire or some other catastrophe. Not all policies are the same. For example, if the property is near an earthquake fault then it may be important to pay extra to get earthquake coverage. If the property is in a flood zone then there will be an extra charge for the risk of flooding. The homeowners insurance will be chosen by the buyer.
  • Property taxes - and the time of closing taxes will be paid. Depending on the month of the closing, there may be prorated taxes due to the seller, or there may be prorated taxes due to the county. The escrow company will provide the correct estimate of the prorated taxes.
  • Escrow account for property taxes and insurance - VA loans will have an escrow account (also known as an impound account) for property taxes and insurance. An escrow account is essentially a savings account the lender holds on the homeowners behalf from which property tax and insurance bills are paid when they come due. The number of months of property taxes initially deposited into the escrow/impound account is determined based on the closing month and first payment month. As an example of how this works, assume the closing date is April 15. Even though the annual homeowners insurance policy was paid through the closing, 2 to 3 months of insurance are deposited into the impound account. And 1/12 of the insurance premium is paid each month as part of the mortgage payment. Also, approximately 4 months of property taxes are deposited into the impound account, and 1/12 of the annual estimated property tax bill is paid into the impound account along with the monthly payment. This is the T&I part of the PITI. Principal, Interest, Taxes and Insurance.
  • Prepaid Interest - this covers the initial interest due on the home loan that will not be part of the first payment. It's important to understand that mortgage payments are made "in arrears", are at the end of the month. This is the opposite of rent payments, which are made for the upcoming month. In the example above, where the closing date was April 15, the first payment would not be due until June 1, or 45 days after the closing of the loan. The June 1 payment will cover interest from May 1 through May 31. But what about the interest due from the closing date of April 15 through April 30? This interest is paid at the closing and is known as Prepaid Interest. 
  • HOA Dues - these are prorated. The escrow company will provide the breakdown, which will initially come from the HOA Management company. If the transaction closes on April 15, then there would be a prorated HOA payment covering April 15-April 30. The buyer will most likely also be billed the May 1 HOA payment. Some HOA's bill semi-annually.
california va mortgage calculator

Know Your Numbers Before You Close

It is important to know your numbers before the day of closing. The more time you have to educate yourself on the numbers and what to expect the less surprises you will have. A good place to get a solid estimate of the costs in a purchase is from your VA Loan Officer. The VA Loan Mortgage Specialist should be able to provide a solid estimate and breakdown during the initial Prequalification stage. Don't wait until your have an accepted offer to educate yourself. 

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Arbor Financial Group NMLS 236669. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process specializing in VA Loans. MLO 223456. – Please contact my office at Fairway Independent Mortgage Corporation NMLS 2289. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process

What is the Debt to Income Ratio on a California VA Loan?

The Debt-to-Income ratio is an important factor used when qualifying for a VA loan in California.  But what is the Debt-To-Income ratio and how is it calculated? 

california va mortgage calculator

The Debt-To-Income ratio, or DTI, is one of the factors lenders use to determine whether a borrower can afford their total payments, including the new housing payment, when purchasing a home. VA is fairly flexible with the DTI compared to other types of financing. VA's guidelines show 41% as the preferred DTI. But it is not uncommon for a VA loan to be approved with a DTI above 50%. Even 60% is not unheard of for a VA loan. It just depends on other factors, including a borrowers FICO score, reserves in the bank, and Residual Income. 

Debt: Monthly Debt Payments

In the case of the DTI, Debt should really be thought of as the debt "payment". Debt-To-Income sounds like a comparison of a Veterans (since we're talking about VA loans) total debts compared to their income. But it really is the monthly debt payments divided by the gross (before taxes) income. For example, if a Veteran owes $30,000 on a car loan with a monthly payment of $500, it is the $500 that is used in the calculation. Not the $30,000. The DTI will be calculated the same way whether the Veteran owes $30,000 or $10,000. Student loans are probably a better example. A Veteran may have $200,000 in student loan debt, but if the monthly payment is only $300 because they're on an Income Based Repayment plan, then the fact that they have so much debt won't hurt them when qualifying for a VA loan.

California VA Appraisal by CaliforniaVALoanExpert.com

Income: Total Gross Income before taxes

The income portion of the DTI is fairly straight forward. This is your gross monthly income. "Gross" meaning your income before taxes are taken out. If your annual salary is $120,000, then your gross monthly income is $10,000. If you also receive VA Disability income of $1,000 per month then your gross monthly income is $11,000. VA does allow for disability income to be "grossed up" by 25% since it is not taxed, but for now we'll leave that calculation alone. For self employed borrowers the Gross Income is calculated AFTER business expenses/writeoffs but before taxes. For example, a self employed person who "grosses" $300,000 but has $250,000 in expenses with an approximate taxable income of $50,000, has $50,000 of income for VA home loan qualifying purposes. Every situation is different, so make sure you have a VA Loan Officer who has experience with income calculation.

The Debt to Income Calculation

Now that we have the two main components of the DTI, lets do the calculation. Just divide the monthly payments by the gross monthly income.  Let's start out with an example where a California Veteran buys a single family detached home for $700,000 with $0 down payment. Below is a breakdown of the payment assuming a Note rate of 3.625% and APR of 3.876%. We are assuming this to be the "first time use" for the Veteran, meaning a 2.3% VA Funding Fee brings the full loan amount to $716,100. The full PITI payment is $4,150, which is made up of the Principal & Interest ($3,275), Taxes ($729), and Insurance ($146). 

Now lets assume our California Veteran has a car payment of $400 and student loan payment of $120. This means that his total monthly obligations, including the PITI, will be $4,670. If the Veteran's monthly income is $10,000, then the Debt to Income ratio is 46.70%. ($4,670 / $10,000 = 46.7%). In most cases, and as long as the Residual Income calculation is within guidelines, a 46.7% Debt to Income ratio on a VA loan will be lower enough for the Veteran to qualify to purchase the home. There are other factors that will need to be considered as well. For example, the credit and FICO score are very important. And of course, does this payment fit within the Veterans budget based on other potential expenses that the VA lender doesn't look at (going out for dinners on a regular basis, or vacation spending, tuition, etc). To have a solid idea of what payment will work and what will not, it's important to work with a California VA Loan Specialist. Below is a link to a complete breakdown of the numbers for buying a $700,000 home. When you click on the image you will also be able to watch a short video explanation of the VA Purchase Analysis.

The First Step in Buying a California Home with a VA Loan: PreApproval

The first step in buying a California home with a VA loan is to talk to a California VA Loan specialist. And we I say "California", I mean if you are planning to buy in California then make sure you are working with someone who also lives in California. If you are trying to get VA questions answered for a California home purchase from a VA lender in Missouri, good luck. California is unique. Our home prices tend to be higher than other states. Also, we have more condos, and to get a VA loan on a condo you need to find a VA approved condo project. That is not easy and an out of state lender will offer little help in determining which condo projects are VA approved. By working with a California VA Loan specialist, you will have the best chance at finding a qualified VA approved home and closing escrow with as little stress as possible.

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Arbor Financial Group NMLS 236669. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process

Are Homes in Southern California too Expensive?

Housing affordability in southern California has been a problem for quite some time now. California Veterans have an advantage of other home buyers since the VA loan program does not require a down payment. The high home appreciation rates in southern California can be attributed to several reasons: less housing inventory for sale, high demand for housing due to population increase, low interest rates, rising rents, and the fact that California has a lot to offer. California has great weather. Depending on the location within California you can be in the mountains or at the beach within a few hours. You can ski and surf on the same day if you really want to. People want to live in California. A lot of people. That creates a high demand for a limited supply of homes. And for all of you economists out there, an imbalance in supply and demand that is heavy on the demand side results in rising prices.

Are Southern California Home Unaffordable?

Housing affordability in Southern California is a hot topic lately. The housing market has been on an upswing for the last several years, and housing prices have been appreciating at a fast pace since the 4th quarter of 2020. But rent is also on an upswing. Interest rates are low too which has helped fuel the real estate market. Low rates have made this a great time to buy a home and Lock in" a payment versus continuing to rent and have your housing cost rise every year. At least with a mortgage, you will lock in your payment for 30 years while rents keep going up year after year.

In order to determine whether homes are unaffordable or not, we must first decide what affordable means to us and how much we can afford every month without sacrificing other aspects of our lives such as food and clothing expenditures.

However, housing affordability is important because it affects not only those who want to buy their home but also renters because if they were able to save money for a down payment, they would be able to buy their own home and start paying rent towards a mortgage rather than throwing money away every month.

So while housing affordability is important, it isn’t everything because if you have to sacrifice your life in order to pay bills for housing then you aren’t living well at all! If housing affordability is your main concern, then you may want to consider moving away from southern California because housing prices are higher in California than in most other parts of the country.

In fact, housing prices in Southern California increased by a staggering 18% over the past year. 

Learn more about which is better for California Veterans: Calvet program or the VA loan.

The chart above shows that even with the run up in home prices, the percentage of disposable income going towards mortgage payments is still less than in previous years going back to 1980. This has been helped greatly by low interest rates.

Housing is Expected to Remain Hot

Home prices increased between 18% and 30% in the last 12 months depending on where in California you are. Home prices can't maintain the current levels of appreciation, but that doesn't mean there will be a crash. The media has been reporting that the market has slowed down. But slowed down from what? In early 2021 it was not uncommon to hear about 20, 30, even 50 offers on one home. How do you even compete as a buyer in that situation? Now, as we approach the 4th quarter of 2021, the "slowdown" means there may only be 3 or 5 offers on a home. Corelogic is projecting appreciation in 2022 of 4% to 5%. That is still a very healthy appreciation and is not a "crash". 

The Affordability Question

Affordability factors income, interest rates, and home prices. There are several "Affordability Indexes" that are calculated by different experts and institutes. Affordability can be very different for one family versus another. A young couple with no kids who are expecting continued income increases may have no problem paying a higher mortgage payment than a couple with young children and/or education expenses. Some people are willing to put more of their income into a mortgage payment versus someone else who wants to travel and go out to restaurants. Everyone's situation is different. But let's look at affordability and dive into the numbers.

When taking into account inflation and comparing past mortgage payments compared to income, it is more affordable now than at any time between 1975 and 2005. 

The chart above shows there have only been two times in the past 45 years when it was less expensive to buy a home than it is right now.

  1. 2010 - After the mortgage meltdown and housing crisis, property values dropped quickly. In 2010 one third of all sales were foreclosures or short sales. There was a supply and demand imbalance in favor of demand, which resulted in prices dropping. Homes were very affordable.
  2. 2020-Last year - Yes-and this is why people are worried. It was more affordable last year than this year.

This shows that although homes are less affordable this year than in 2020, we are still more affordable right now compared to all but two years over the last 45 years when including inflation into the equation.

What if we also factor in Equity to the Affordability Question?

One of the biggest reasons to own a home is to grow your net worth. You do that by paying your mortgage balance down and by owning a home that is appreciating in value. Let's compare someone renting a home for $2,500 with a $50 insurance payment to someone purchasing a $700,000 with 5% down. In year one you'll see in the chart below the payment difference is $2,550 (rent) versus $3,745 (own).  But more importantly, look at the Net Monthly Payment comparison. The Net difference is less since approximately $1,179 of the mortgage payment is principal. Principal paydown goes straight to net worth. It's like putting money into your savings account, except this is putting it into the equity of your home. 

The chart below shows shows the full payment breakdown, also know as the PITI. Principal & Interest, taxes, and insurance. And in this case, Mortgage Insurance since the down payment was less than 20%. 

The chart below shows a Net Worth comparison for renting versus owning after 15 years. Total rent payments over 15 years are $656,357. That assumes the first year rent of $2,550 with 5% annual increases. 15 years of PITI payments would be $649,617. $261,979 of the PITI is Principal, which just helps push Net Worth higher. Plus, using the same 5% appreciation rate that we assumed for rent increases, and the total equity in the home is $1,052,229 after 15 years.

The sooner a potential home buyer can purchase a home and get off the rent hamster trail, the sooner your Net Worth will grow. And it's even easier for California Veterans since the VA loan program does not require a down payment. The first step in the California home buying process is to contact a California mortgage specialist who can prepare a custom Purchase Analysis based on your home buying goals, budget, and wants and needs. From there, you should get PreApproved for a mortgage BEFORE you begin making offers on homes. Some lenders are more adept at working with home buyers while some only focus on refinancing. Make sure to find a California Loan Officer who can guide you through the homebuying process and answer all of your home financing questions. 

Authored by Tim Storm, a California VA Loan Officer specializing in VA Loans. MLO 223456. – Please contact my office at Arbor Financial Group NMLS 236669. My direct line is 714-478-3049. I will prepare custom VA loan scenarios that will be matched up to your financial goals, both long and short-term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process