Benefit from special perks and resources to ease military moves.
By Kimberly Lankford, Contributing Editor
From Kiplinger’s Financial Field Manual: A Personal Finance Guide for Military Families
Military families tend to move often, sometimes with little notice, which can make it tough to decide whether to buy a home or rent. But you also have access to some special perks that can help homebuyers.
Members of the military receive a tax-free Basic Allowance for Housing (BAH) to cover all or part of your rent or mortgage payment. If you buy a home, you can deduct mortgage interest, even if you use your tax-free housing allowance to pay for it. And you can qualify for a VA loan, which doesn’t require a down payment or private mortgage insurance.
Even with these special benefits, the rent-versus-buy decision is a difficult one, especially when you consider that you may be stationed in an area for only a few years. “You need to consider how long you anticipate being the owner of the home, how much debt are you willing to take on and can carry responsibly, and what is the expected appreciation,” says Mike Greene, senior vice president for financial advice at Ameriprise Financial, who served as a combat engineer in the Army. “For many people, buying a home is the biggest decision they will make, and it’s important to have someone run the numbers and run the scenarios and really understand your goals.”
Fortunately, help is available from the Personal Finance Management program on your base. You can also search for a Certified Financial Planner in your area at letsmakeaplan.org. Click on “government and military” to find an adviser who specializes in helping military families.
Steps to Take Before Buying
All families must carefully weigh the decision about whether they can afford to buy a home. Military families, however, have additional factors to assess.
Consider the Potential for a Military Move
Could you afford to keep the house even if you have to move to another city? It’s important to evaluate the home’s rental potential because that can be another option if you have to move.
Familiarize yourself with the rental market in the area, so you can identify how much you could potentially receive in rent. Then compare this amount to your mortgage payments.
Some families try to limit their monthly mortgage payment to a few hundred dollars less than the BAH for someone of similar rank in the area. That way, they’re more likely to have a pool of potential renters who could afford to pay enough to cover their mortgage and any other costs (such as property management fees, which can run about 10% of the monthly rent) they would have to carry if they couldn’t sell when they have to move.
It helps if you eventually plan to move back to the area, either before or after you leave the military, so you’d only need to rent out the house for a limited number of years.
Compare Several Types of Mortgages
Servicemembers can qualify for a VA loan, which lets you buy a home with zero money down and no private mortgage insurance (see benefits.va.gov/homeloans for details). Interest rates on VA loans tend to be comparable to other mortgages, but fees are sometimes higher. If you have a good credit score and can make a down payment, the VA loan may not be the best deal, says Andy May, chief operating officer for AAFMAA Mortgage Services, which specializes in helping military families with a variety of types of mortgages.
“Only one in three people we work with select a VA loan when they’re presented with all of the options,” he says. Veterans with a disability rating, however, get a break on VA loan fees, usually making that their best deal. If you do get a VA loan with no down payment, recognize that if prices fall even modestly, you could wind up underwater, which means you’ll owe more than the house is worth.
Boost Your Emergency Fund
Keep extra money in a safe and accessible account that you can use to cover your mortgage, utilities and other expenses for a few months if you can’t find a new renter right away. The Servicemembers Civil Relief Act makes it easy for members of the military to get out of leases when they’re deployed or receive orders to move—which can be great when you’re the renter, but tougher when you’re the landlord and lose your tenant with little notice.
Understand Special Tax Rules for Home Sale Profits
If you eventually sell your home for a profit after renting it out, there are special tax rules that can minimize the bite. To claim tax-free profit (up to $250,000 for singles or $500,000 if you’re married filing a joint return), civilian homeowners must live in a house for two of the five years leading up to the sale. Military families, however, must live in the house for just two of the preceding 10 years to qualify for this tax break. See IRS Publication 3, Armed Forces Tax Guide for details.
Take Advantage of Available Mortgage Help
For more information about special programs that help servicemembers who are struggling with mortgage payments, see Fannie Mae’s advice at knowyouroptions.com/military.
You also can find a housing counselor approved by the U.S. Department of Housing and Urban Development at www.hud.gov, or by calling 800-569-4287 or 888-995-HOPE. And learn about government programs to help with loan repayment at makinghomeaffordable.gov.
The Consumer Financial Protection Bureau has resources to help servicemembers with mortgage issues as well.