While the guidelines of most lenders require that your debt-to-income ratio is no greater than 36% of your income, military life seems to make the answer to the question of how much house can you afford even easier to estimate.
Military families are provided a set housing allowance (BAH) that covers rent and utilities. As of 2015, renter’s insurance is no longer covered as part of the military housing allowance. That means that if you have a BAH of $1,500 and you’ve estimated that utilities will cost $200, then you should have $1,300 to afford a mortgage that includes principal, interest, and taxes, right?
Well, a simple BAH breakdown isn’t the only way that you can look at home affordability.
Using the budget of $1,300 for BAH after utilities that we discussed, let’s look at what you can afford with that budget.
How Much House Can You Afford?
You Can Afford Whatever Amount of Mortgage that a Monthly Payment of $1,300 Will Buy
- A 30-year mortgage with 3.5% interest will get you approximately $170,000 worth of property.
- A 15-year mortgage with a 3% interest rate will get you approximately $130,000 worth of property.
As you can see from the above example, you'll receive a lower interest rate by selecting the 15-year mortgage. Though you can’t afford as much property initially, you may want to consider whether the extra $40,000 worth of property is worth paying $1,300 a month for an additional 15 years. That will add up to $234,000 over 15 years. Can you afford that?
Also, if you’re purchasing with less than a 20% down payment, you’ll need to factor in mortgage insurance (PMI), so if you can afford a down payment, then you can obviously afford a larger property and you have the added bonus of keeping an average of $100 a month extra in your pocket from not having to pay PMI.
You Can Afford Whatever Amount of Mortgage That the Market Will Bear in Rental Value
If you’re a military family buying a house with the intent of renting it, then congratulations on beginning your home buying process with your exit strategy in mind! In this case, you’re seeking to buy a home as a business, so you’ll need to do your market research. Meet with multiple property managers to better understand the market in your area. Seek out what types of properties are in high demand and, using your family budget, calculate what type of high-demand rentals will keep you under the 36% debt-to-income ratio. If you can’t find any that meet this quota, then this may not be the duty station for you to purchase a home. Keep saving, and try again next time.
You Can Afford What You Can Pay for…in Cash!
On Budget Loving Military Wife’s blog, blogger Nichole recently shared a story of a young military couple Jennifer and Michael. The couple is in their mid to late 20s, and they already have $76,000 in savings in their future house fund alone. This couple belongs to a mindset of people who believe that the only house they can afford is the one that they can purchase outright for cash. With a goal of purchasing a home in the $150,000 to $200,000 range, the couple is well on their way to achieving their financial plan.
Jennifer and Michael are not alone in their belief that cash is a good way to purchase real estate. In 2013, the National Association of Realtors reported that 33% of all real estate transactions were conducted for cash, and 22% of those were by home buyers who were moving from one location to another (military family, anyone?). Buying in cash can not only help give you the peace of mind of having no home debt, but it can also help you negotiate in a hot market where you can offer a home seller a quick closing with no need for the lengthy appraisals and inspections required by agencies such as the FHA and VA.
We each have our own concept of affordability that comes from a combination of our background, education, and projections for our financial future.
How does your family determine how much house you can afford when you PCS?