After joining the military, most servicemembers live in barracks. However, depending on rank, marital status, and service branch, many will use their basic allowance for housing (BAH) to live off base or off post.
Once you’ve decided to live off base, your next choice is whether to rent or buy a home. The answer is not always simple, especially if it’s your first time getting your own place — it raises several other questions. What’s your next career move? How long will you be at your current duty station? If you buy, will you be able to sell when you PCS again or are you willing become a long-distance landlord?
On the other hand, when mortgage interest rates are low, the option to purchase a home may be the better way forward. “It could be cheaper by a few hundred dollars a month, and help you build long-term wealth,” says Kevin Crooks, AAFMAA Mortgage Services LLC Branch Manager in Wilmington, NC.
What it Costs
Renting a place to live is pretty straightforward — prior to moving in, you sign a lease agreement, pay a security deposit, and make the first rent payment. Each subsequent month in the term of your lease, you pay the rent as specified in the lease. Your rent payment is likely fixed for the term and won’t increase without proper notice. Also, you won’t be responsible for any major repairs unless they’re necessary because of your harm or negligence. Plus, if you receive orders to PCS, you’ll have the option to terminate the lease with 30-day notice.
When you buy a primary residence with a VA Home Loan, which typically offers low interest rates and a no down payment option, you’ll need to work with a VA-approved lender to determine how much you can borrow. Most lenders will require a credit score of at least 640 and a low debt-to-income ratio to qualify. So, before contacting a lender, it’s a good idea to know your credit score and take steps to lower your outstanding debts, if necessary.
In addition to lender and real estate agent fees, you’ll pay a VA funding fee that varies based on how much you’re borrowing and the amount of your down payment (if any).
The good news is that with a fixed interest rate, you’ll have a set monthly mortgage payment, which could include setting aside funds in an escrow account to have your mortgage company pay your property taxes and homeowners insurance – so you don’t have to worry about remembering to make those payments. Of course, if your property taxes or homeowners insurance premiums change, then your monthly payment amount may vary. You also get more benefits like choosing where you live, remodeling to your liking, and building equity. “In many areas of the country, home prices are rising steadily and owning even just for a few years can give you a good return on your investment,” Crooks says.
Of course, as a homeowner, you’re responsible for all maintenance and repairs — there is no landlord to call when the air conditioner goes out or the fridge breaks. So you will want to have sufficient emergency savings for these unforeseen issues and you might consider a home warranty service if you don’t have much saved.
Assessing Your Needs
One of the biggest factors in your rent versus buy decision is knowing how long you’ll stay in an area, Crooks says. “If you’ll only be there 12-18 months, it might not be worth the money to buy. It’s also likely to be more convenient for you to rent.”
Selling a recently-purchased house costs money, he points out, including any necessary repairs and staging before it goes on the market and paying fees and real estate commissions at the close. However, it might matter less if you plan to rent the home when you leave. “Keeping the home as a rental ties up some of your VA Home Loan entitlement but chances are you’ll still have enough left to buy a home in the future,” Crooks says.
The VA Home Loan entitlement is the maximum amount a servicemember can use toward purchasing real estate. The VA backing guarantees the lender that the VA will be responsible for the loan if a borrower defaults on the loan. If you qualify for a loan based on your income and credit history, your lender will likely agree to loan you up to four times the amount of your entitlement without a down payment. “Most lenders require that your entitlement, down payment, or a combination of both cover at least 25% of your total loan amount,” explains Crooks.
“If real estate investing is part of your overall retirement strategy, you can use a VA Home Loan to finance 100% of a home that ends up being a rental,” he says. “A lot of Members own homes in multiple states to build wealth. It can be a very effective investment strategy,” he says.
We’re Here to Help
If you’re not certain about whether or not it’s the right time to purchase a home, please contact us online today or give us a call at 844-218-6926. An expert Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of low-rate and low-cost mortgages designed to meet your needs. Ensuring our Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today!