You need income to qualify for a VA loan. If you are active in the military, some of your money may come from your Basic Allowance for Housing. Luckily, you can include this money on your loan application for qualifying purposes, but it must meet certain requirements.
What is BAH Income?
Active military members receive a monthly allowance if government housing isn’t provided where they are stationed. This money is meant to help you afford housing in that area. The money isn’t restricted to use for rent – you can use it to buy a home too.
No two military members will receive the same amount. It’s based on several factors including:
– The cost of rent in your area
– The size of your family (dependents)
– Your rank
BAH income won’t be your only qualifying income though. You can use any and all sources of income as long as you can verify them, which we discuss below.
The Cost of Living
The good thing about BAH is your mortgage payment doesn’t determine how much you receive. It’s based on the above factors. For example, if the typical cost of rent/living in your area is $1,500, but your proposed mortgage payment will only be $1,000, you have $500 left. You are free to use that $500 to help lower the other costs of living, such as utilities, home maintenance, or homeowner’s insurance.
Proving your Income
Just like you would if you weren’t in the military, you must prove your income will last for the foreseeable future. You must also prove that you receive it consistently. Typically, you can prove receipt with your bank statements. You’ll also need to prove your continued service in the military. If you are due to retire soon, you cannot use BAH for qualifying purposes. Your lender will determine just how long they require you to receive it, but 24 months is usually an average time limit.
How BAH Helps
Your Basic Allowance for Housing can help lower your debt ratio and increase your monthly disposable income. Both numbers are important, but the VA puts emphasis on the disposable income. This factor sets them apart from many other loan programs.
Your disposable income is the money left over after you pay all of your bills. Let’s say you make $4,700 gross each month. Your new mortgage payment will be $1,500 including taxes and insurance. You also have the following monthly bills:
– Car payment $200
– Credit card minimum payment totals $150
– Personal loan $150
Your total monthly bills equal $2,000. This leaves you with $2,700 in disposable funds each month. If you live in the South and have 5 family members, the VA requires you to have $982 in disposable funds each month, so you pass that requirement.
This isn’t to say that they don’t look at your debt ratio, because they do. It’s just not their main focus. Generally, your total debt ratio should not exceed 41%, but each lender can grant exceptions as long as you have enough disposable funds each month. The VA feels that the disposable funds help a borrower stay afloat rather than focusing on the debt ratio.
If you are active in the military and don’t have plans to retire within the next 12 – 24 months, using your BAH income can help you qualify for a VA loan. If you will retire soon, but have a job lined up already, it can still help as VA financing is very flexible, allowing you to secure a mortgage even while you are still in the military.