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VA Loan Library Comments

Using Basic Allowance for Housing (BAH) on VA Loans

 
Chris Birk | Author of "The Book on VA Loans"

When it comes to your income and purchasing power, active duty military members can often count military allowances as effective income toward getting a mortgage. Probably the single most powerful allowance out there is Basic Allowance for Housing (BAH).

This monthly allowance is for qualified service members stationed in areas where government quarters aren’t provided. It’s a stipend that helps service members keep up with the costs of housing if they’re living off-post or off-base. There aren’t restrictions on BAH that limit service members to renting -- you can use this monthly allowance to help you qualify for a VA loan and buy a home.

And your BAH could cover most or even all of your monthly mortgage payment.

Now, to be sure, everybody’s situation is different, and homeownership isn’t the right fit for every active duty military member. But if you’re getting BAH and you’re interested in buying a home, it’s a pretty incredible opportunity if the pieces come together.

Let’s take a closer look at how BAH works and what it can offer qualified buyers.

How Basic Allowance for Housing Works

The Defense Department calculates BAH rates on an annual basis, and the amount can vary depending on geography, pay grade and whether you have dependents. DOD looks at current rental costs in the area and things like average costs of utilities and renters insurance. The rate is based on a service member’s duty location, not on the location of the residence.

Service members stationed in more expensive parts of the country typically have higher BAH rates, which allows them to better compete in more expensive civilian housing markets.

While BAH rates are subject to change each year, the Defense Department has instituted rate protection that prevents your BAH from going down. This protection remains in place unless the service member changes duty stations; experiences a pay grade reduction; or has a change in dependent status.

Mortgage lenders will typically verify your BAH through your Leave and Earnings Statement (LES), and they’ll want to feel confident you’re likely to continue receiving it.

Because BAH is non-taxable, VA lenders can “gross up” this income to create what’s essentially a pre-tax, or gross, figure for calculating your debt-to-income (DTI) ratio.

Basic Allowance for Housing & Buying a Home

Let’s build a couple of basic examples to show you what BAH can mean for a homebuying budget.

To help us create a consistent and more realistic picture of purchasing power, let’s use the following information:

  • We’ll say you’re an E-4 with dependents
  • Your VA loan will ultimately come with a 4.5 percent interest rate
  • The monthly escrows for your property taxes and homeowners insurance will total $260
  • We’ll look at BAH at two different duty stations: Fort Campbell in Kentucky, and Fort Belvoir in Virginia

Over the last five years, the average BAH rate for an E-4 at Fort Campbell has been about $1,200. Using just this $1,200 as your housing budget, you could roughly look to buy a $190,000 house based on our example loan parameters. That purchasing power is based solely on your BAH rate.

If you wanted to pump another $500 a month from your monthly base pay into your housing budget, now you’re talking about a monthly mortgage payment around $1,700. At that amount, your purchasing power jumps to $290,000, just by putting $500 of your regular pay toward housing each month.

Now, let’s look at a more expensive housing market. Over the last five years, the average BAH rate for this same E-4 stationed at Fort Belvoir has been about $2,100.

With the same example loan parameters as before, just that $2,100 BAH payment could buy you a $365,000 home. Putting that same $500 from your regular pay toward housing in this market pushes your purchasing power to nearly half a million dollars.

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Putting Basic Allowance for Housing to Use

Now, you certainly don’t have to push your BAH to the limit. Depending on your housing costs, it’s possible to have BAH left over each month to pay for things like utilities and other household expenses. But it’s also important to understand that BAH may not cover your entire mortgage payment.

Remember, too, that changes to your service or to your family situation can affect your BAH rate. Most active duty homeowners are going to relocate. In some military communities, it might be easy to turn around and sell or rent out your home when the time comes to PCS. But there are no guarantees.

BAH can be an incredibly powerful tool for VA homebuyers. Talk with a Veterans United loan specialist at 855-259-6455 about your specific situation and what might make the most sense given your homebuying and financial goals.

A final note: Basic Allowance for Housing for active duty military members is different from the monthly housing allowance provided to veterans utilizing their Post-9/11 GI Bill education benefits. Lenders will not count educational assistance income toward mortgage qualification.

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