Operation American Dream: A Guide to Buying and Keeping Your Home in the Military
Owning your own home. It's the American dream, right? Well for people who are in the military, home ownership can be a bit more difficult to attain. The constant reality that you may have to move at any moment makes it difficult to really settle down. If you want to experience homeownership, here are some tips to help you make wise choices, even while embracing military living.
Considerations When Buying a Home
Before you buy your home, you need to make sure you are ready. Some considerations are universal to homeowners, while others are specific to military homeowners. Here's what you need to think about before jumping into the possibility of buying a home.
Can You Afford It?
The biggest question is whether or not you can afford to buy a home. Experts recommend that you spend no more than 28 percent of your pretax income on your housing costs, including the mortgage, insurance and property taxes. In addition, all of your monthly debt payments, including any credit cards, should not exceed 36 percent of your gross income. So before making any other considerations, determine if you can afford a mortgage.
Understand the Tax Benefits (or Lack Thereof)
One of the reasons many civilians opt to buy a home instead of renting is due to the tax benefits. However, members of the military are taxed differently than civilians, especial if they are edible for tax-free combat pay, living and housing allowances. Because of this, military families with kids may not receive much of a tax break when they buy a home.
Investing in Real Estate is a Slow Investment
Real estate is an investment that typically grows with time, but the key to that statement is the word "time." It takes time to see equity build up in your home, and in some markets home values can actually drop depending on market conditions. Since the military life is highly mobile, it's possible that you wont' see much return on that investment if you buy a home.
How Long Will You Be There?
If you know that you are on a three- or four-year assignment, does it really make sense to buy a home? Consider how long you will be at your current location before you make the choice to purchase property.
Choosing a Realtor
If you decide that buying a home makes sense for you, the next step is to choose a realtor. Your real estate agent is going to be a key player in helping you find and negotiate the purchase of the home that best meets your needs. You need to choose one carefully, ensuring that your agent fully understands military life and the specific needs you face as a member of the military.
If you are going to use a VA home loan to buy your home, it's vital that you choose an agent that understands the program. The VA home loan has specific requirements about the inspections necessary for the home as well as the overall condition of the home. Using an agent who understands this will help prevent delays and heartbreak in the process.
In addition, look for an agent who:
- Has strong negotiation skills.
- Has a long track record of successful sales.
- Has worked with other members of the military before.
- Has a personality you enjoy working with.
- Is able to give you insight into homes that are coming to market before they hit market.
- Understands your local market well.
Paying for a Home While In the Military
If you have served in active duty, are a veteran or have a lot of hours as a reservist, you may be able to enjoy one of the biggest perks of military life - the VA home loan.
The VA home loan allows you to buy a home with competitive rates and no down payment. This can make it easier to afford your first home. In order to qualify for the home loan program, you must meet one of these qualification categories:
- A veteran discharged honorably who served a full period of active duty or 24 continuous months.
- An active duty member of the military who served 90 continuous days.
- A National Guard or Reserve member who served 90 active service days.
- A National Guard or Reserve member who was discharged honorably or retired after six years of service.
- Another service member discharged due to hardship, convenience of the government, reduction-in-force, medical conditions or a service-connected disability before serving out the required number of days.
If you are eligible, or think you are eligible, you will need to apply for a Certificate of Eligibility from the VA. Your lender can help you with this particular process.
The VA home loan is one of the most affordable home loans available, but it is not free. You will pay a funding fee for your home loan, which is a percent of the total loan costs. For a no-down-payment loan, you will pay between 2.15 and 2.40 percent for the funding fee. You will also pay up to 1 percent in origination fees to your lender. This amount is capped by the VA. These fees can be rolled into the loan to require little down at closing.
Other than the no down payment and additional fees, a VA home loan works just like any home loan. Find a lender that works with the VA home loan program, and apply for the loan as you normally would.
Non VA-Home Loan Options
Of course, you do not have to use the VA home loan to buy a home while in the military. If you don't wish to use it or don't qualify, you can use other loan programs, including:
- Conventional loans - This is your standard bank loan that anyone with decent credit can get. Conventional loans can be either fixed or adjustable rate loans.
- FHA Loans - Designed for people with a small down payment or poor credit, the FHA loan is government-backed and provides loans through local banks for those who can't get traditional mortgages.
- USDA Loan Program - Another zero-percent-down loan designed of those living in small cities or rural areas.
If these don't fit your needs, talk to your lender about other options that may be out there.
The reality of military life means that you are probably going to receive PCS orders at some point. No matter how much you love your home, chances are high that, at some point, you're going to have to sell it. So, when shopping for a home, make sure you keep resellability in mind.
While many factors impact a home's resale value, some are more important than others. You can update paint and flooring, but these resale factors you can't change:
- Location - Buying a home in a strong neighborhood and an area that has a great number of community amenities means you will be able to sell more easily. Also, look for walkability in the community, which is becoming increasingly important to the modern homeowner.
- Size and layout - While it's possible to add a bedroom or convert a basement into a family room, the reality is that the basic size and layout of a home is not so easy to change. Today's homeowners are looking for slightly smaller floor plans with open-concept designs, so keep that in mind as you search for your home. That said people want at least three bedrooms, and a second bath or half bath will increase your home's ability to sell quickly.
- Upgrades and updates - New appliances, new windows, new roof - these features make a home easier to sell. If you buy a home that already has these upgrades, and receive PCS orders soon after purchasing, you'll find that it's easier to sell.
- Age and condition - Typically speaking, people are drawn to newer homes or historic homes, but something 30 or so years old may not have as high of a value. In addition, you will find your home sells more quickly if it is in good repair. While you could buy a fixer-upper, be realistic in what you're intending to do to the home.
- Schools - If you are looking in an area of Austin or Dallas that has very different schooling options, consider buying a home near good schools. While you may not need them, depending on your stage of life, future buyers will.
- Storage - Today's buyers want storage. Make sure the home you buy has ample, accessible storage.
While it's hard to think about selling your home when you're buying it, the reality of military life means you need to be prepared for this possibility. By buying strategically, you will make your future move much less stressful.
Consider Future Goals
Military life is fairly fluid. Before buying a home, consider your future goals. Ask yourself, is this community somewhere that you would be willing to settle down during retirement? If the answer is yes, then buying now, and renting the house when you move or deploy, may be a great option. If not, then you might want to wait to make the commitment to buy a home.
When making these considerations, you must ask:
- Where do I see myself setting down after military life?
- How long do I intend to stay in the military?
- Does this area offer non-military job options?
- Will this home be an asset to my future, non-military life?
Taking a closer look at these questions will help you determine whether or not now is the right time to buy a home.
What to Do When You PCS
Once you have purchased a home, you need to be prepared for the eventuality of PCS orders. Unless you are planning to retire from military life soon, you are going to have to move some time in the next three to five years. So what are you going to do with your home? You have two basic options: sell the home or rent it. Both have benefits and drawbacks to consider.
Selling a Home During a Military Move
If you choose to sell, then you may be able to use equity that has built in your home to buy your next one, providing you the benefit of only owning one home and not having to be a long-distance landlord. However, since you may have only owned the home for a few years, the equity may not be very high. Also, being able to sell requires a strong market, which you may or may not have. Finally, when you receive PCS orders, you may not have long to manage the move and get the home sold before you have to report at your new station.
Renting a Home During a Military Move
Renting the home can help you enjoy more tax benefits form the home, even after you have moved out. It can also bring in some income, and can allow you to protect your home for your future use if the home is located somewhere you would wish to settle when you retire.
Renting is not something to take on lightly, though. As a landlord, you are responsible for maintaining and repairing the home. You will need someone on the ground at the location who can deal with this when you are far away. Also, you always run the risk that the home will be damaged by your renters. You should also plan to spend about 2 percent of the home's value per year on keeping it maintained. Also, if you decide to sell at a future date, you may end up paying capital gains taxes on the income you receive from the sale.
Help for Texas Military Families Looking to Buy Homes
The state of Texas takes good care of its veterans. Here are some statewide programs and organizations that might help you as you look to buy a home.
Resources for Dallas Military Families
Military life can be very lonely, at times. For those who live in the Dallas metro area, a number of resources are available to help you stay connected and informed. Check these out:
Resources for Austin Military Families
Like Dallas, the city of Austin, TX, has a number of support groups and programs designed to help military families get the resources they need. While not specific to buying a home, many of these organizations can help you determine what the next step in military homeownership might be.