Military Homebuying: What Service Members Need to Know About Debt and Mortgages
Service members face unique challenges when it comes to buying a home, especially when it comes to managing debt and mortgages. Whether you are a first-time homebuyer or a seasoned real estate investor, understanding the ins and outs of military homebuying can help you make informed decisions and avoid costly mistakes. This article explores what service members need to know about debt and mortgages when buying a home.
Debt-to-Income Ratio
One of the most critical factors in qualifying for a mortgage, is your debt-to-income ratio (DTI). This ratio measures your monthly debt payments (credit cards, car loans, and student loans) against your monthly income. Lenders use this ratio to determine whether you can repay the loan.
As a service member, you may have additional sources of income, such as Basic Allowance for Housing (BAH) or Basic Allowance for Subsistence (BAS), which can affect your DTI ratio. Some lenders may also consider your military benefits, such as VA disability compensation when calculating your income.
It’s essential to have a low DTI ratio when applying for a mortgage. Ideally, your DTI should be at most 43%, but some lenders may have more stringent requirements. If your DTI is too high, you may not qualify for the loan or may be approved for a lower amount than you need.
Credit Scores
Your credit score is another critical factor in qualifying for a mortgage. Lenders use your credit score to evaluate your creditworthiness and the risk of default. As a service member, unique circumstances, such as frequent moves, deployments, or unpaid bills due to travel or overseas assignments, may impact your credit scores.
It’s essential to monitor your credit score regularly and take steps to improve it if necessary. Pay your bills on time, keep your credit card balances low, and avoid opening new credit accounts unless necessary. You can also request a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) once a year to check for errors or inaccuracies.
VA Loans
Service members have access to VA loans designed specifically for military homebuyers. VA loans offer several benefits, including no down payment, lower interest rates, and no private mortgage insurance (PMI) requirement.
To qualify for a VA loan, you must meet specific eligibility requirements, including serving a minimum period of active duty or being a surviving spouse of a service member who died in the line of duty. You’ll also need a Certificate of Eligibility (COE) from the VA.
Budget
Keep your budget in mind when looking for a home and a mortgage. You can get started by following a few general guidelines.
The price of your home should not exceed 2 to 2.5 times your yearly salary.
You should strive to borrow 50% to 80% of the home’s value maximum for your mortgage, and your payments per month shouldn’t be more than 35% of your income.
You might be qualified for a VA home loan. Some of these loans are backed by the Department of Veterans Affairs, enabling the private lender to offer you a lower rate.
These are only guidelines; the specifics of your case may vary and influence your decisions.
Credit card usage
Military service members should manage their credit card usage for home buying for several reasons:
- Debt-to-income ratio: When you apply for a home loan, the lender will look at your debt-to-income ratio, which is the percentage of your monthly income that goes toward paying off debt. A lot of credit card debt can affect your debt-to-income ratio and make it harder to qualify for a mortgage.
- Interest rates: Credit cards often have high-interest rates, which means you could pay a lot of interest charges if you carry a balance. This can make saving up for a down payment or mortgage payment harder.
- Credit score: Your credit score is a key factor in getting approved for a mortgage and getting a reasonable interest rate. Having a lot of credit card debt can lower your credit score and make it harder to qualify for a mortgage or get a reasonable interest rate.
- Financial stability: Managing credit card debt is essential for overall financial stability. If you have too much credit card debt, it can be a sign that you are living beyond your means and not managing your finances well. This can make it harder to handle the financial responsibilities of homeownership.
Therefore, military service members must manage their credit card usage for home buying to ensure they qualify for a mortgage, get a reasonable interest rate, and maintain financial stability. They should keep their credit card balances low, make timely payments, and avoid taking on new debt.
Debt repayment
Military service members should prioritize paying off high-interest debts before home buying for several reasons:
- Lower debt-to-income ratio: High-interest debt, such as credit card debt, can have a significant impact on a service member’s debt-to-income (DTI) ratio, which is the percentage of their monthly income that goes towards paying off debt. A high DTI ratio can make qualifying for a mortgage or a favorable interest rate harder. Paying off high-interest debts can lower the DTI ratio, making getting approved for a mortgage easier.
- Lower interest payments: High-interest debts, such as credit card debt, typically have higher interest rates than mortgages. By paying off high-interest debts first, service members can save money on interest payments and use that money to pay down their mortgage or save for other expenses. Military servicemen can enroll in a debt consolidation program to lower interest rates on credit cards. Once they enroll in a debt consolidation program, debt counselors negotiate with creditors for an affordable monthly payment plan with a drastic interest rate reduction. And that helps military servicemen to save money.
- Better credit score: Paying off high-interest debts can also improve a service member’s credit score, which is a crucial factor in getting approved for a mortgage and getting a reasonable interest rate. A higher credit score can help service members save money on other expenses, such as insurance premiums and car loans.
- Reduced financial stress: Carrying high-interest debt can be stressful and make it harder to manage finances. By paying off high-interest debts, service members can reduce financial stress and focus on saving for a down payment and other expenses related to homeownership.
Therefore, paying off high-interest debts before home buying is a wise financial decision for military service members. It can help them lower their DTI ratio, save money on interest payments, improve their credit score, and reduce financial stress.
Timing is Everything: The PCS Conundrum
For service members, the constant threat of relocation (PCS) can throw a wrench into the homebuying process. Should you buy or rent? Here’s what you need to consider:
Renting may seem cheaper than owning, but consider the advantages and disadvantages of each.
Advantages of renting a home
You can apply your BAH to rent, are not responsible for severe maintenance concerns, pay lesser upfront fees, possibly have cheaper monthly payments, and may be able to move more quickly if necessary if you rent.
You will receive fresh orders as a military member and might be required to go immediately. If you are a homeowner, a PCS could force you to continue making payments while your home sits empty and on the market for months or even years.
It is possible to rent out your property, but doing so while serving in the military can be time-consuming, expensive, and difficult.
Disadvantages of renting a home
There are several disadvantages of renting a home for military servicemen. Here are some of them:
- Uncertainty and instability: Military personnel is often required to move frequently, sometimes at short notice. This can make establishing roots in a community and building a stable life difficult. Renting a home means that there is no guarantee that you will be able to stay in one place for an extended period.
- Limited control: As a renter, you have limited control over the property. You may not be able to modify the home or decorate it as you would like. In addition, you may have to adhere to strict rules set by the landlord or property manager.
- Risk of rent increases: The cost of rent can increase over time, making it difficult to budget and plan for the future. This can be particularly challenging for military personnel with a fixed income.
- Security deposit requirements: Many landlords require a security deposit, which can be a significant expense for military personnel already facing financial challenges. In addition, there is a risk of not getting the full deposit back at the end of the lease term.
- Lack of privacy: Renting a home means living on someone else’s property, which can limit your privacy. You may have to deal with neighbors who are noisy or intrusive, or you may have to share common spaces with other renters.
- Limited space: Depending on your budget, you may not be able to afford a spacious home, which can be challenging for military personnel with families. Limited space can also make storing belongings difficult and make the home feel comfortable.
While renting a home may be convenient for military personnel, it can also have several disadvantages.
Advantages of military homebuying
When you purchase a home, you can use your BAH to pay the mortgage and are in charge of maintenance.
When you purchase a home, you can use your BAH to pay the mortgage and are in charge of maintenance. You have to make your mortgage payment unless you sell. You can personalize your house any way you like, and you might gain tax benefits.
Military OneSource offers several financial planning tools that will assist you in evaluating your options, including the kinds of mortgages that might suit your circumstances.
Suppose you bought a property before going on active duty. In that case, you may be eligible to have your mortgage interest rate dropped to 6% under the Servicemembers Civil Relief Act (SCRA), with all excess interest payments made under a higher interest rate being waived.
Disadvantages of buying a home
While buying a home may seem like a good idea for military service members, there are also several disadvantages. Here are some of them:
- The risk of losing money: The housing market can be unpredictable, and if you buy a home at the wrong time, you could lose money if the property’s value decreases.
- Responsibility for maintenance and repairs: As a homeowner, you are responsible for the upkeep and maintenance of the property. This can be challenging for military personnel who are frequently on the move and may not have the time or resources to handle repairs and maintenance.
- Financial strain: Buying a home can be expensive, and it may be challenging for military personnel to save up for a down payment while paying for other expenses. In addition, a mortgage can be a significant financial burden, especially if the interest rates are high.
- Limited flexibility: If you own a home, picking up and moving quickly can be challenging if you receive orders to relocate. Selling a home can take time, and you may need help finding a buyer at the price you want.
- Potential for foreclosure: If you fall behind on your mortgage payments, there is a risk of foreclosure. This can have significant consequences for your credit score and make it challenging to obtain credit in the future.
- Homeowners association fees: If you buy a home in a community with a homeowners association, you may be required to pay fees to cover maintenance and upkeep of the common areas. These fees can add up over time and increase your monthly expenses.
While buying a home can provide stability and a sense of ownership, it also comes with several disadvantages, especially for military personnel who may face frequent relocations and financial challenges. It’s essential to carefully consider your options and assess your financial situation before buying a home.
Closing Costs
Closing costs are fees associated with purchasing a home, such as appraisal fees, title insurance, and attorney fees. As a service member, you may be eligible for specific discounts or exemptions on closing costs.
For example, some lenders may offer a “VA loan seller concession,” where the seller pays a portion of the closing costs on your behalf. You can also negotiate with the seller to include closing costs as part of the purchase price or ask your lender to waive specific fees.
Conclusion
Buying a home as a service member can be complex, but understanding the basics of debt and mortgages can help you navigate the process successfully. By managing your debt-to-income ratio, monitoring your credit score, and taking advantage of VA loan benefits and closing cost discounts, you can make homeownership a reality for you and your family.
