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The hard choice between owning and renting a house is almost always complicated for first-time homebuyers. This decision is naturally more complex for anyone active in the military. Whether the down payment or affordability, finance is only one aspect of all essential considerations in deciding whether or not it’s smart to buy a house while still in the military.
Buying a house while in the military is smart if you’re at a permanent duty station. Ownership is also viable and rewarding if you stay at a base for 7 to 10 years. Otherwise, the upfront costs and recurring financial compulsions will defeat all the benefits of homeownership.
Renting has its limitations but is more economical in many cases, except for some areas where owning is financially more affordable. Various personal and service or duty-specific factors are consequential, too. If you struggle with saving money or investing which is more important as a military employee, this article is for you. This guide elaborates on every significant element to help you decide if you should buy a house while in the military.
Reasons Why It’s Smart To Buy a House While in the Military
It’s smart to buy a house while in the military when:
- You’ve chosen your permanent hometown.
- You’ve found your dream house.
- Renting isn’t working out for you.
- Ownership is more suitable for your needs.
- The financial calculations favor ownership.
- Special reasons necessitate ownership.
Any generalization isn’t a nuanced or pragmatic approach. Every possibility warrants specific consideration. While using a mortgage banker vs. mortgage broker is important, buying a house isn’t solely a financial exercise. Hence, let’s now talk about a few personal factors that make buying compellingly convincing.
You may want to buy a house in your hometown where you were born or raised. This reason provides more than sufficient motivation to buy a house and sustain its ownership, subject to affordability.
Like many comrades, both contemporaries and retired veterans, you may realize that a city, town, or neighborhood is ideal for your permanent place of residence. Delaying ownership will increase the required investment as the real estate prices appreciate over the years.
The rental properties or other affordable housing options for cheap living in your area may not suit your family, especially if you have several dependents, children, and pets. Also, you may find a house that is straight out of your dreams, which becomes an even more convincing reason if your dear ones are equally excited.
All these reasons are strong personal motivations to buy a house. You can and probably should consider buying a house in such circumstances unless the cost of ownership is practically unmanageable. Be sure to know the process of home buying, including the home appraisal checklist and deeds.
See what is an insured non-residential grant deed, so you know.
Reasons Why You Shouldn’t Buy a House While in the Military
It’s not smart to buy a house while in the military if:
- The cost of ownership is unsustainable.
- Renting is convenient and affordable.
- You’ll move abruptly within 2 to 5 years.
- You’re unsure about near-term plans.
- The purpose is to rent out or flip.
- You aren’t ready to own a house.
Renting doesn’t entail a substantial upfront cost like the down payment and closing fees. Also, the cost of ownership isn’t restricted to the upfront investment and the home loan. You’re responsible for everything about the property, financially and logistically.
Don’t consider buying a house if you aren’t sure about living in it. You may move to another station or base abruptly or at short notice. You might decide to move for some reason. Also, you may have a Permanent Change of Station (PCS). All such circumstances favor renting.
It’s not uncommon for anyone to be unsure about their near-term plans. It’s not pragmatic to buy a house if you don’t intend to live there for at least 7 to 10 years. The initial investment isn’t feasible if you have to move soon and find a new house.
Real estate prices don’t always go up. Properties undergo depreciation, too. Hence, you may incur a net loss if the real estate prices dip in the short term when you have to sell.
You can keep the house and continue repaying the mortgage if you can afford it. Alternatively, you may choose to rent it out, but all such options involve recurring expenses. Flipping is no longer in vogue, so that shouldn’t be a pre-purchase consideration at all.
If you are looking to invest in real estate, there are other options instead of buying a house. One easy option is to invest in real estate crowdfunding and let companies such as Fundrise do the heavy lifting for you.
The Practical Cost of Buying a House While in the Military
There’s a huge difference between the perceived financial commitment and the practical cost of buying a house, then sustaining it through thick and thin. This difference is unavoidable for all civilians and those in the military. However, the actual figure varies substantially for individuals.
Active military personnel can benefit from buying a house and account for their ownership expenses while claiming relevant allowances. The current policies may help you reduce the down payment, manage the mortgage, and pay for a few other costs.
If you have a bankruptcy, you can still buy a house with a Chapter 13 bankruptcy and be successful on the purchase.
The Home Loan
The two substantial costs of buying a house are down payment and mortgage repayment or the monthly home loan installments. You can follow the steps on how to save for a house fast for your down payment. Active military personnel can qualify and leverage the Veteran Affairs home loan program to reduce their initial investment or be eligible for a particular mortgage.
You may check the US Department of Veteran Affairs home loans program, find out if you’re eligible, apply for the certificate, and explore the available options to opt for up to 100% financing. Here are eligibility requirements for VA home loans.
You can consider a VA direct or backed home loan. In both cases, VA home loans involve a funding fee, which depends on the down payment and if you’re using the program for the first or second time.
Some active-duty veterans are exempt from the VA funding fee, subject to these criteria, but other closing costs may apply. If you’re a Purple Heart recipient, the VA funding fee isn’t applicable for your home loan.
VA direct home loans don’t require mortgage insurance. However, VA-backed home loans may require private mortgage insurance (PMI), and other available allowances or benefits may not cover that.
You can include the VA funding fee in the loan amount. Hence, you don’t need to consider the funding fee as an extra monetary obligation, if applicable in your case. However, if you don’t wish to pay the fee upfront and include it in the loan, you may incur interest on the amount.
Those eligible for VA direct home loans with up to 100% financing can buy a house without any down payment while in the military. Also, you may consider the interest rate reduction refinance loan (IRRRL) if you know a better VA option is available.
Basic Allowance for Housing (BAH)
The Basic Allowance for Housing (BAH) covers either rent or mortgage for those living off-base and not provided with official boarding facilities. You may use some of this allowance or its entirety to pay the home loan installments.
The BAH varies from one base to another, depending on many factors. Thus, you must calculate the allowance you’re eligible for and if that would suffice to pay a particular mortgage. You may note a difference between the two, with the mortgage being a tad dearer.
Consider buying a house if you can conveniently pay for the difference. However, the BAH doesn’t cover all types of expenses you’ll incur as a homeowner. For instance, it doesn’t cover any renter’s insurance. Likewise, your BAH may not cover the private mortgage insurance.
Active military personnel opting for VA-backed home loans often require mortgage insurance to qualify. If the down payment is low or nil, the mortgage insurance can be expensive, and you must factor this cost into your immediate financial obligations.
Homeowners pay property taxes per the applicable rates. Business Insider reports that the median property tax ranges from as low as $587 to as much as $8,300 per year.
The report based on data from Census Bureau and WalletHub accounts for the rates of different states and the median home prices in respective regions. You can check the full list through the cited link to know the applicable property tax in the state where you intend to buy a house.
Active military personnel may avail of property tax exemption in certain states subject to the mandated criteria. The Servicemembers Civil Relief Act provides many other protections, including mortgage rates and foreclosures.
Michigan empowers active service members to get property tax relief using two policies. The Principal Residence Exemption is available for those willing to retain it while being active in the military. The other Property Tax Relief is applicable for active military personnel without principal residence in the state.
Connecticut provides property tax exemption up to a limit for active military veterans, subject to 90 days of wartime service. This relief also applies to automobiles.
Maryland provides an exemption from property taxes to disabled veterans, active or retired, and surviving spouses.
Some states provide partial or complete relief from property taxes for active service members. Colorado offers a tax deferral option. Iowa provides an exemption for those that have served in a war or at least 18 months during peacetime.
Utah offers a complete exemption to those serving out-of-state. Also, all 50 states provide some or complete relief from property taxes to disabled veterans. Here’s a full list and the states’ policies.
You may use the Basic Allowance for Housing for some of the routine maintenance costs. You can include mortgage, utilities, and typical repairs. If you have questions such as can I put my electric bill in someone else’s name and use BAH, be sure to seek answers. However, any special maintenance will have to come from the out-of-pocket 5% of the BAH you receive.
The BAH is calculated on the basis of median rental costs in a city, town, or neighborhood. Hence, if your mortgage is significantly higher than the average rent in an area, you won’t have much of the allowance left to use for any other expenditure.
The specific calculations or estimates for every category are significant. For instance, the property tax relief in a state may not fully compensate for your monthly or yearly financial obligation to the IRS.
Likewise, everything from mortgage payments to insurance, closing costs, and maintenance vary widely across the states and, more importantly, in areas or neighborhoods.
Credible has this fantastic guide to help you determine the cost of buying a house. Factor in the military allowances and state-specific exemptions you are eligible for when you calculate an estimate.
Repairs and Improvements
According to Clever Real Estate, American homeowners spend an average of $2,676 per year on maintenance and repairs and around $6,649 on home improvements. Many repairs are unavoidable. Some home improvements are essential, even if you buy a new property.
You may save some of the average $2,600 that homeowners pay in property taxes. However, you may still have to bear some of the median $1,228 that homeowners pay for insurance.
Clever’s findings reveal that almost 60% of homeowners surveyed rely on loans or credit cards, at times both and others, to pay for renovations. 25% of homeowners said that they have less than $500 for repairs.
A common mistake of first-time homebuyers is not factoring in the regular costs of maintenance, repairs, and improvements. There are ways to how to reduce your housing costs to consider. However, you must also account for homeowners’ association costs if you choose a planned community or similar residential projects.
Renting vs. Buying a House While in the Military
Landlords often impose certain limitations on how tenants can live and what all they can do on the premises. Once you own a house, you can enjoy every liberty guaranteed by the constitution. As service members know all too well, each of those freedoms has a steep price.
BAH Is Sufficient To Cover Rent, Not Mortgage
The Basic Allowance for Housing is primarily based on the median rents in a particular market and the average cost of utilities. Thus, you’re far more likely to cover your rental and other essential costs using the BAH.
You may also opt for Advance BAH to account for security deposits and other initial expenses for a rented property. Such advances may not be applicable or adequate for a down payment towards a home loan.
Buying a house isn’t necessarily capping your monthly obligations per the market medians or averages used to calculate the BAH. Hence, your mortgage payments can easily exhaust the maximum allowances you get.
Renting Is Inexpensive in Many Cases
You have to pay for everything when you own a house. A tenant usually has many typical expenses paid for by the landlord: HVAC, electrical fixtures, plumbing, landscaping, mold removal, termite treatment, and emergencies.
Furnished properties usually have several pre-installed appliances, among other utilities. Landlords are also responsible for any crime prevention system in place. According to Nolo, alarm systems cost more than $20 per month, significantly higher in most cases.
You don’t pay any property tax as a tenant as the landlord is the owner. However, you may have to pay for renters insurance. Almost always, tenants pay much less than homeowners for insurance.
ValuePenguin reports the average homeowner’s insurance is $1,445 per year. You may pay as low as $600 in a few states or as high as $2,600 in some.
One analysis published by The Motley Fool says homeowners pay around $2,600 for maintenance and repairs, $6,500 on home improvements, $2,600 in property taxes, and $1,200 for homeowners insurance.
In effect, you’re looking at a yearly expenditure of around $13,000 that doesn’t include your mortgage payment, the initial investment including the closing costs, and other expenses involved in finding a house, buying, moving, and setting everything up.
Buying Is an Investment
Renting has no net financial return on your recurring and sustained expenses. Buying a house has a potentially rich return. Housing is a great way how to build wealth from nothing as long as you make a monthly payment. The financial rewards aside, a house is an invaluable, integral part of a homeowner’s life, almost a living member of the family.
US home prices appreciated at around a 5.3% average growth rate in the last 30 years. The year-on-year growth rates in the first two quarters of 2021 were 12.5% and 16.5%, respectively.
On the flip side, US real estate prices, especially housing, crashed to -11.9% after the 2007-2008 financial crisis. Rare crises apart, property prices appreciate in due course, and you can sell a house in a decade or so for a significant profit.
Buying a house has some tax benefits. The mortgage interests and some other components of the closing costs are exempted from federal income tax. These tax benefits make the ways to invest 50k in real estate favorable.
You may get relief from paying capital gains tax on the sale of your principal residence for profits up to $250,000 (single filer) or $500,000 (filing jointly).
Civilian taxpayers have to live in the property for two years or longer out of 5 to claim the capital gains tax relief. However, the 5-year rule for ownership and ten years for use are waived if you’re on official extended duty at 50 miles or farther from the residence.
Military Benefits For Buying a House
The top military benefits for buying a house are tax breaks and ease of qualifying. Civilians buy houses to improve their quality of life; military personnel buy because they can afford it.
Military personnel also buy as an investment, as purchasing a house becomes financially viable within the first few years on active duty, even before BAH rates rise or increase more than usual. Looking at the Basic Allowance for Housing (BAH) tables, we can see that the BAH amount can go a long way to help supplement a mortgage payment.
The ability to buy a house sooner rather than later is another prime benefit you get as a member of the US Armed Forces. You don’t have to wait until your family grows or your next step up-the-ladder to buy a place of your own.
If overseas, you may wonder, “can I get a mortgage loan from a foreign bank?” Rest assured, this is possible, but there are limitations depending on the bank.
Related Questions and FAQ:
Should I Buy a House Overseas While Deployed?
Buying a house overseas can be challenging, but it’s possible if you do your research ahead of time. Make sure you buy in an area where the housing market is slowly rebounding or growing so that you won’t lose money when/if you sell later. Look into 1031 exchange companies near me for their service overseas.
Can I buy a house before my first assignment?
It depends on what branch you’re with and how long your contract is. For example, if you’re Air Force, you can buy homes at most stateside locations during your first assignment because their contracts are set up to allow home purchases. Navy personnel aren’t allowed to buy homes until they’ve been at their intended base for two years; Marines can buy right after training if their MOS (job) doesn’t require frequent relocating. Other branches may have similar rules, so check with your local recruiter.
How can I buy a house overseas?
It’ll be more difficult to buy a home abroad than it would at stateside locations because you need to prove citizenship (to buy real estate) or residency (to buy vehicles). If possible, buy your property before moving to the country; otherwise, you will probably face corruption charges if your stuff gets held up in customs. You can also ask around to see if anyone’s renting homes or apartments that aren’t on the market yet, but don’t expect this option to be widely available; people usually want their own homes. Also, remember buying property abroad requires paying taxes and legal fees, which can be challenging if stationed outside the country. See can passive income be used to qualify for a mortgage overseas.
Can I buy a condo as a single service member?
Yes, but this is typically only an option if you’re an officer since they usually have higher salaries than enlisted personnel. To buy a condo alone, you must earn at least 50% of the median income for your area (must live on-base to buy); this is most often the case if you’re stationed in a state with higher real estate prices, such as New York. It’s also likely that your condo will be more expensive than those for sale to married couples or families, even though it’s cheaper than buying a house. Check out how to get a mortgage loan and save money to offset expenses.
Active military service members can leverage several available policies to reduce the down payment requirement, applicable mortgage interest rate, and other upfront costs.
Property tax exemption, capital gains tax relief, and allowances applicable to mortgage payments make buying a home a practical decision.
While there are ways to reduce home costs and save money using solar power, for example, you must be ready to make a long-term investment still. Being comfortable with all the additional costs and perennially prepared for any eventualities, including emergencies, is a significant financial commitment.