Let me educate everyone interested in a Cal-Vet loan.
1) A Cal Vet loan is a land installment contract, which means that the California Department of Veteran's Affairs buys the home free and clear and holds title with the veteran holding the right to specific performance when the loan is paid off.
2)So if you fail to make your payment there is no foreclosure. Your past payments convert to rent and Cal Vet's remedy is to reclaim the property and keep the equity within it.
3)If there is a second mortgage on the property it has to first force judicial foreclosure on the property to come after the borrower (in this case both the veteran and Cal-Vet who agreed to the encumbrance).
4)Because Cal-Vet holds title free and clear (it is not legally a lien holder) the second has priority and Cal-Vet will pay off the encumbrance or the sale will pay off the "junior" lienholders first.
This program benefited Cal Vet when home prices were increasing and upon default they could sell the property for a profit and keep it. However, now their reluctance to work with veterans makes no sense as they bear all the risk.... more