Many families' largest investment is their home. And homeownership comes with an extra portion of complexity for military families. Many were hit particularly hard by the housing downturn, saddled with houses they simply couldn’t sell when ordered to move to a new location.
But servicemembers also have special mortgage programs and tax breaks to help them afford a home—and assistance if they're unable to sell.
Key Home-Buying Decisions
Members of the military receive a tax-free housing allowance to cover all or part of their monthly rent or mortgage payment. (To check on the Basic Allowance for Housing—BAH—by rank and zip code, use the tool at the Department of Defense Web site. If you buy a home, you can deduct mortgage interest, even if you're paying it with that tax-free money. But the rent-versus-buy decision is difficult when you may be stationed in an area only a few years.
When home prices were rising quickly, many servicemembers bought homes even if they expected to live in an area only for a year or two. They banked on selling for a profit (or renting the house for more than the monthly payments) when they were transferred. But the bursting of the housing bubble upended countless such plans.
Patrick Beagle, a retired Marine helicopter pilot who is now a financial planner in Virginia, recommends limiting housing costs to no more than 30% of your take-home pay. He also suggests that you consider buying only if you plan to stay put for at least three years—five is better.
A house will probably have to appreciate in value by 6% or more just to cover the costs associated with buying and selling. And, appreciation is not guaranteed. Beagle points out that since 2007, average housing prices have dropped 25%—from $220,000 to $165,000—in Fayetteville, N.C., home of Fort Bragg. A lot of people he works with are choosing to rent, especially if they're stuck with a previous home worth less than what they owe on the mortgage.
Jennifer Hernandez, an Air Force spouse and real estate agent in Williamsburg, Va., recommends that military families consider the home’s rental possibilities as part of the buying decision—because the odds are high that they'll have to rent it out instead of sell for a profit. "When I take them out looking for a house to buy, we talk about whether they can rent the house for enough money to make the mortgage payment," she says.
Some families try to hold the monthly mortgage payment to a few hundred dollars less than the BAH for someone of similar rank in the area. That way, they figure they're likely to have a pool of potential renters who can afford to pay enough to cover the mortgage and other costs (including property-management fees)they’d have to pay if they couldn't sell when they are transferred. If you become an absentee landlord, you'll need to hire a management firm. Such services tend to charge 10% or so of the monthly rent, says Hernandez.
Servicemembers who buy can benefit from VA loans. Interest rates tend to be comparable to other mortgages, but you can still buy a home with zero money down. For more information about VA loan eligibility and rules, visit the Department of Veterans Affairs Web site.
Shortly after they were married in 2009, then-Marine sergeant Hunter Pulliam and his wife, Nicole, used a VA loan to buy their first house in Sheridan, Ark. "Our first home only cost about $120,000, but like most people in their twenties, we hadn’t saved up $12,000 to $18,000 or more for a down payment," says Nicole. But be careful if you go the no-down-payment route. Recognize that if prices fall even modestly, you could wind up underwater, owing more than the house is worth.
Rent or Sell?
Many military families wind up as accidental landlords, renting homes they can’t sell after receiving transfer orders.
If you find yourself in that situation, set aside an emergency fund to help cover your mortgage and other expenses if you go without a renter for a few months. Hernandez points out that the law that helps members of the military get out of leases when orders demand that they move or deploy can be a double-edged sword if you’re renting to fellow servicemembers. She recommends keeping at least three months' worth of mortgage payments and other expenses in an emergency fund in case a tenant leaves unexpectedly. If you eventually sell your home for a profit after renting it, there are special tax rules that can minimize the bite. Civilian homeowners need to live in a house for two of the five years leading up to the sale in order to claim tax-free profit on the deal (up to $250,000 for singles or $500,000 of tax-free profit if you’re married filing a joint return).
But military families need to live in the house for just two of the preceding ten years in order to qualify for the tax break. For more information on this and other tax rules for members of the military, see IRS Publication 3, Armed Forces Tax Guide, at www.irs.gov.
For more information about your options when dealing with a house worth less than you owe on your mortgage, see Fannie Mae's advice at www.knowyouroptions.com/military. You can find a housing counselor approved by the U.S. Department of Housing and Urban Development at www.hud.gov or by calling 800-569-4287 or 888-995-HOPE. For details on the government's Home Affordable Foreclosure Alternatives (HAFA) program, which now considers military PCS moves as a hardship for eligibility, see www.makinghomeaffordable.gov. And if you bought your home before 2006 and received PCS orders to move between February 2006 and September 2010, you may qualify for the Homeowners Assistance Program (HAP). Visit http://hap.usace.army.mil for details.