Home-Buying Tactics for Military Families

Special tax rules are designed to help military families who decide to rent out their homes when they are transferred to their next duty station.

By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance

February 2009

For many families, their largest investment is their home. But home buying is extra complicated for military families, who tend to move frequently and sometimes with little notice. At the same time, servicemembers have access to special mortgage programs and tax breaks to help them afford a home. Be sure you make the most of these special benefits and protect your investment.

Should you buy or rent? Members of the military receive a tax-free housing allowance to cover all or part of their monthly rent or mortgage payment. And if you own a home, you can deduct 100% of your mortgage interest, even if you're paying it with tax-free money. Nonetheless, it can still be tough to decide whether to rent or buy a house when you may only be stationed in an area for a few years.

MILITARY FAMILY MONEY GUIDE
	To U.S. Military Personnel and Their Families
	Savings Strategies for Military Families
	Avoiding Scams That Target Military
	Be Prepared for Deployment
	Home-Buying Tactics for Military Families
	Time to Become a Civilian Again
	Financial Resources for Military Families

When home prices were rising quickly, many servicemembers bought homes even if they only expected to live in an area for a relatively short period of time, with the hope that they could sell for a profit (or rent it out for more than their monthly payments) when they were transferred. But you can't count on either outcome in this economy.

Patrick Beagle, a certified financial planner who specializes in helping military families, recommends renting for at least a few months when you move to a new area, so you'll learn about the neighborhoods and can pick the best place to live. Then, he recommends buying a house only if you plan to live in the area for at least three years -- five years is even better. (Remember, the home will probably have to appreciate in value by 6% or more just to cover the costs associated with buying and selling.)

He also recommends limiting housing costs to no more than 30% of your take-home pay, so you won't struggle with monthly expenses. Don't forget to include the cost of homeowners insurance, property taxes, utilities and regular maintenance when toting up the real cost of owning. The housing calculators in our tools section can help you run the numbers.

Also remember that your Basic Allowance for Housing (BAH) will vary depending on the cost of living in your location; if you move to a new area, your housing allowance may be more or less than you're currently receiving. To check on the BAH for your rank and zip code, use the tool at the Department of Defense Web site.

When deciding how much house you can afford, be particularly careful if you'll be leaving the military soon. After you leave, you won't get the tax-free housing allowance anymore, you may have to pay state income taxes for the first time, and your job may not be as stable (a potential layoff becomes much more of a concern when you're in a civilian job). Keep these realities in mind when calculating your expenses, and build up a bigger emergency fund to help you pay the bills for at least a few months if you or your spouse lose your job.

Should you take advantage of special mortgage options? Active-duty military personnel, as well as certain veterans, reservists and National Guard members, are eligible for Veterans Administration loans, which generally allows them to borrow up to $417,000 with no down payment or private mortgage insurance (the cap is higher in certain high-cost counties; go to www.homeloans.va.gov for a full list of the current limits).

VA loans are made by private lenders and interest rates may vary. But they can be particularly valuable for people who don't have the money to make a 20% down payment, would otherwise have a tough time qualifying for a loan, and who would be required to buy private mort-gage insurance, which usually costs 0.5% to 1% of the loan amount each year. For more information about VA loan eligibility and rules, visit the Department of Veterans Affairs Web site.

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