The decision to become a homeowner while in the military requires diligent consideration due to factors unique to military life. Home ownership as a great opportunity to get grounded and plant some roots. However, home ownership decisions must involve careful financial and lifestyle planning.
While military service offers you the opportunity to see new and varied parts of the world, that mobility can discourage or even prohibit the stability of home ownership. Yet, with proper research and a plan, home ownership can be a smart choice — and personally rewarding.
If you’re considering home ownership (for the first, second or third time), start the process by asking yourself these 6 pivotal questions before you decide OR get emotionally attached to a home.
1. Am I financially ready?
Financial readiness is one of the key factors in deciding whether it’s time to buy instead renting. In assessing your finances, consider these key components:
- Will your credit score qualify you for a mortgage?
- Do you have enough money for a down payment, closing costs, and any additional out of pocket expense at the time of closing?
- Do you have enough savings to handle unexpected expenses, like needing to replace a big appliance or the furnace?
- Does your monthly budget have room for mortgage payments with taxes, PMI, insurance, utilities, and other incidentals, in addition to non-housing expenses (food, car payments, insurance, etc.)?
- How much debt do you currently have? Anything above 50% debt-to-income ratio hurts your mortgage rate and you end up paying more.
2. Do I know my credit score?
Before you start contacting lenders for rate quotes / qualification, you should know your credit score. Credit scores range from 100-850 (850 being pristine and 100 be not fundable). But be cautious when checking… Every time someone pulls your credit, it reduces your score.
Tip: If you get all your rate quotes within one month, separate inquiries within that time frame won’t hurt your score!
Once a year, you can request a free credit report from AnnualCreditReport.com. This includes a report from each of the three primary reporting agencies – Experian, Equifax, and TransUnion. Select the option to receive reports from all three agencies at once, since you don’t know which agency your loan provider will use. Also, scores from these sources can vary, with mistakes showing on only one report, so you can really cover your bases.
A great resource you may have without knowing it is your monthly credit card statement. Many credit card companies offer free reporting of your FICO credit score! But again, you should know all three credit companies score. Most lenders use the middle score, ie: if yours are 700, 717 and 740, they will use 717. Oddly enough, depending on the credit reporting service the lender uses, you could show different scores than they report. Different scores tiers qualify you for different mortgage rates: 740 and above typically provides the best.
Before you start looking to buy, take time to improve your credit score in order to get the best mortgage rate possible. Your credit score and your debt to income ratio are the two main factors in getting the best rates.
Tip: If you find errors on your report, take the time to get them corrected. If you otherwise have great credit but you’ve got erroneous items on your report, a good lender can work with you to get these removed and request a Rapid Rescore to get your credit score corrected quickly.
3. Do I know the market where I want to buy?
Often, military members are making the decision to rent or buy from a distance, prior to moving into the area. In these case, it is essential to thoroughly research local housing market conditions. Take into consideration average home prices, pricing trends, average days on market (especially if you are hoping to sell when you PCS), local schools and trending neighborhoods. Your best bet is to find a military-friendly realtor that is familiar with the local market and can help you navigate the special needs/circumstances of inbound or local military and their families.
4. What is my timeline?
We all know that there is very little absolute certainty for military service members. In many cases though, you should have some idea of how long you will be staying in the area. If you are PCSing for a school and can reasonably expect to PCS again within 12 to 18 months, then it might not be the right time for buying. On the other hand, if your assignment is expected to last two or more years then it’s worth considering.
When you plan to leave the military or retire is also a factor. Many duty stations are in locations that are very military friendly in regards to tax rates, access to military benefits and healthcare, and the State’s treatment of military pay and benefits. Even if you will likely PCS from your current location or if retirement or separation will bring you back the area, then purchasing a home now could be a good step towards your future.
Ask yourself too– if you purchase and then PCS to a new duty station, are you willing to be an absentee landlord or hire a property manager? Home prices don’t move quickly and it may take 2+ years to recover just your closing costs –assuming an appreciating market, which is not guaranteed — so selling within two years may not make sense. If you are willing to keep the property and rent it out, you must compare your ongoing expenses (mortgage, taxes) with local rental rental rates to determine if your costs can be covered by rent. If the home is in a large military area, you are not likely to have an issue with occupancy (given that the home is in good condition and it’s managed well).
5. How much house can I buy?
As a general rule of thumb, you don’t want to spend more than 40% of your monthly income on housing, including mortgage, taxes, insurance, and maintenance. If these expenses are projected to be above 40%, then you may want to save up, pay down bills and work towards home ownership in the future. Be sure to consult with a mortgage lender before making the final decision. You can talk to a mortgage lender about your options without them pulling your credit or making any commitment.
6. What are my financing options?
One of the best benefits of serving in the military, but the least understood is the VA Home Loan — a mortgage loan guaranteed by the U.S. Department of Veterans Affairs but issued by qualified lenders, like banks or mortgage companies. For active duty or veterans that qualify, the VA loan makes it easier for you to purchase or refinance a home.
First, you’ll need to verify your eligibility for a VA loan by obtaining a Certificate of Eligibility. Once you have that, you’ll select a VA approved lender. Take the time to select someone who is very familiar with VA Loans. That experience could be the key to making your home buying process a smooth one. Then it’s time to start the search for your new house!
If you decide that now is the right time to buy, here’s what you can expect the process to generally look like.
Step 1: Decide whether home-ownership is for you
Step 2: Get pre-qualified
Step 3: Get pre-approved (obtain Certificate of Eligibility for VA Loan)
Step 4: Find a Realtor
Step 5: Look at Homes
Step 6: Choose a Home(s)
Step 7: Obtain Funding
Step 8: Make an Offer
Step 9: Close
We want to know:
What are your concerns about buying a home while on active duty?