Can You Use BAH to Qualify for a Mortgage?
Understand how Basic Allowance for Housing (BAH) can be leveraged for mortgage qualification and homeownership.
The Basic Allowance for Housing (BAH) provides financial support to military service members to help cover housing costs. This allowance is a significant component of a service member’s compensation, especially when government-provided housing is not available. Understanding how BAH functions is important for service members considering homeownership and navigating the mortgage qualification process.
Understanding Basic Allowance for Housing
Basic Allowance for Housing is a non-taxable allowance provided to service members in the United States to help offset civilian housing costs. Its purpose is to ensure service members can afford adequate housing when military quarters are not provided. BAH amounts are determined by the service member’s pay grade, dependency status, and permanent duty station location.
The Department of Defense annually reviews and adjusts BAH rates based on median market rents and average utility expenses for civilians in specific local areas. BAH is paid directly to the service member as part of their regular pay, and they are responsible for managing these funds for their housing expenses. Service members are protected from a decrease in their BAH rate unless their duty station changes, their pay grade is reduced, or their dependency status changes.
How BAH is Considered for Mortgage Qualification
Mortgage lenders, including those offering conventional, FHA, and VA loans, consider Basic Allowance for Housing as stable and verifiable income. BAH can be included in a borrower’s total income when assessing their mortgage eligibility. Because BAH is a non-taxable allowance, lenders often “gross up” this income, treating it as if it were higher to account for tax savings, which can increase a borrower’s purchasing power.
To verify BAH, lenders require documentation such as the service member’s Leave and Earnings Statement (LES). This statement provides a detailed breakdown of their pay, allowances, and deductions, allowing the lender to confirm the BAH amount. Lenders also assess the stability of the BAH, preferring that the service member is not within 12 months of separating from military service to ensure the allowance will continue.
BAH contributes directly to a borrower’s debt-to-income (DTI) ratio for mortgage approval. The DTI ratio compares monthly debt payments to gross monthly income, and a lower ratio indicates a greater ability to manage additional debt. Including BAH in the income calculation can improve this ratio, making it easier for service members to qualify for a mortgage.
BAH and VA Loan Specifics
Basic Allowance for Housing holds significance for service members utilizing VA home loans. The non-taxable nature of BAH and its ability to be “grossed up” by lenders is beneficial for meeting income and debt-to-income requirements for VA loans. This increased qualifying income helps service members access VA loan benefits, such as no down payment requirements for eligible borrowers.
VA loans look for a debt-to-income ratio of 41% or less, though exceptions can be made based on other compensating factors. BAH can improve this ratio, strengthening a service member’s loan application and increasing their chances of approval. Lenders also consider “residual income” for VA loans, which is the amount of disposable income remaining after all major expenses are paid, and BAH helps boost this figure.
Service members must obtain a Certificate of Eligibility (COE) to confirm their VA loan eligibility. The COE verifies service history and discharge status, which are prerequisites for accessing VA loan benefits. Understanding how BAH directly supports the financial aspects of a VA loan can help service members effectively plan their home purchase.
Financial Planning for Homeownership with BAH
Service members using BAH for homeownership should plan for all associated costs beyond the mortgage principal and interest. Property taxes, homeowner’s insurance premiums, and potential Homeowners Association (HOA) fees are recurring expenses that must be budgeted for. Additionally, homeowners should anticipate maintenance and repair costs, which can vary and accumulate over time.
BAH amounts can change due to various factors, including Permanent Change of Station (PCS) moves, promotions, or changes in dependency status. Service members should factor these potential fluctuations into their long-term financial planning to avoid unexpected shortfalls. BAH is designed to cover a percentage of housing costs, typically around 95%, meaning service members may need to cover a small portion of housing expenses out-of-pocket.
Maintaining an emergency fund is a prudent financial strategy for all homeowners, especially those relying on BAH. This fund can provide a buffer for unforeseen home repairs, increases in housing costs, or other financial emergencies.