Financial Planning for the Military: Buying a Home
If you are on active military duty, soon to separate from the military, or a veteran living in the Greeneville, Tennessee area, you may need financial planning for veterans, particularly in the process of purchasing a home.
Homes constitute a major form of equity for many Americans, as their monthly mortgage payments ultimately translate into ownership of the home and its worth, as well as providing tax-advantaged benefits such as tax-deductible interest payments. But the home-buying process may be complicated for veterans since while on active duty, Uncle Sam provided their housing free of charge.
Not only that, but the lack of homeownership while in the military can leave service members financially behind civilians. Whether you’ve served five, 10, or 20 or more years in the military, many of your civilian counterparts were paying a home off during that same time period. They have five, 10, or 20 or more years of accruing equity in a home, plus the other benefits of homeownership.
What’s the solution? There are several solutions, actually. First, if military personnel set aside money while on active duty, they can purchase a home at retirement, placing themselves in a good financial position. Second, if they can make a very large down payment, minimizing mortgage debt that needs to be paid off.
Third, they can obtain a mortgage from the Department of Veterans Affairs (VA). VA loans are specifically designed to benefit veterans by offering lower interest rates than many other types of mortgages and better terms (such as no requirement for mortgage insurance).
Here’s a brief overview of how to purchase a home for military service members and veterans.
1. Develop a budget
The first step in homeownership after military life may seem to be actually searching for a home – but it isn’t! Your first port of call should actually be developing a budget.
Many folks think of a budget as a recipe for being on a tight financial leash. It isn’t, though. A budget is no more and no less than a record of what your income is and what your expenditures are, month by month.
To develop one, start keeping track of all your expenses (or estimates of your expenses after you separate from the military) and all your income sources. Divide expenses into major categories, such as food, utilities, any other debt service (such as car payments and credit card debt), clothing, transportation costs, and more.
Budgets can help you accomplish multiple financial goals. First, any healthy financial life needs to be based on making sure your expenses don’t exceed your income. A budget gives you a record, so you can see if any expenses need to be trimmed, or (alternatively), if you need to increase your income after military service.
Second, military members need to acquire a sense of expenses in civilian life. Not only their housing, but many other items are provided either free or at a discount. Keeping a steady record will help you acclimate to new spending patterns.
Third, and most relevant to housing, you need to know how much you can reasonably spend on housing every month if you plan to get a mortgage. In general, banks require that you have a debt-to-income ratio (DTI) of no more than 41 percent before they approve you for a mortgage. (Your debt-to-income ratio is exactly what it sounds like; the percentage of debt service you carry vis-à-vis your income.) To estimate your own DTI, divide your monthly debt payments from all sources (including a mortgage, either actual or estimated) by your gross monthly income (before taxes, in other words).
If you are currently active duty, your Basic Allowance for Housing (BAH) can be considered income. BAH is determined by your location, pay grade, the size of your family, and more.
Once you have a sense of approximately how much you can pay, you can determine what regions, areas, and neighborhoods are appropriate to shop in. Real estate prices vary sharply all over the country. You want to locate in an area where the mortgage will be affordable!
2. Understand VA home loans
As mentioned above, VA home loans provide multiple benefits to veterans or active military service members who want to get a mortgage. (Spouses of active military are often eligible for VA loans as well.)
It’s important to understand what a VA home loan is. The loans don’t come directly from the VA. Banks and other financial institutions all over the country partner with the VA to offer these loans to military personnel. You will need to work with a bank or credit union that offers these loans. Your mortgage application and other material go through the bank, not the VA.
How do you find a financial institution that offers VA loans? Many advertise that they offer VA loans. Working with a financial advisor can also help.
A financial advisor can also help you understand the benefits of a VA loan, such as low or no down payments if you haven’t saved during your military service.
3. Pre-qualify for a mortgage
Don’t wait until you choose a home to apply for a mortgage! The smartest move is to pre-qualify, which you do by applying to a VA mortgage lender such as a bank or credit union.
Pre-qualification gives you several advantages. First, real estate in many parts of the country is very competitive. You may be vying for a home with several other potential buyers! Sellers are naturally more inclined to sell to someone already qualified for a mortgage.
Second, a successful mortgage application depends on several factors, such as your credit score. While VA loans can be more lenient about credit scores than standard loans, it’s still possible for a mortgage application to be rejected (though it’s not common). If you do need to redress certain areas to be approved, the pre-qualification process lets you know that, so you can fix those areas.
A financial advisor who is a veteran in addition to being a CERTIFIED FINANCIAL PLANNER™ Professional, such as Steven L. Dick, President of Sapiat Asset Management, can help you with the VA mortgage process, budgeting, and every other aspect of comprehensive financial planning for active military and veterans. Get in touch with Steven today!