Military Housing Allowance, otherwise known as BAH, is that beautiful, nontaxable line of the military’s LES that makes housing more affordable. This form of income goes a long way toward helping military buyers qualify for a VA loan. As every service member knows, the amount varies based on the area, rank, and dependents, but what many military buyers may not understand is how BAH is used to qualify for a VA loan. Not only will we explain this, but we will also show hacks for using a higher “grossed up” income toward buying a home.
Is My VA Loan Payment Limited By My Military Housing Allowance?
For VA loan qualification purposes, a buyer’s loan payment is not limited by their housing allowance pay. Assuming that the service member meets VA qualifications, it is possible for a house payment to exceed the BAH. Historically, the military housing allowance covers 95% plus of a local market’s rent cost. While it is not a requirement to stay under the applicable housing allowance for an individual, it is worth considering. The government has thoroughly researched each market to determine the average housing cost, so a buyer should use this research when looking to buy or rent.
The military considers an annual cost of living adjustment to the housing allowance to keep up with housing cost increases, so this income is set there for a reason. Even though a military buyer’s VA loan payment may exceed their BAH, ultimately it is the buyer’s decision to stay within his/her household’s budget.
VA Loan Qualification Factors
- Residual Income
- Housing Ratio
- Total Debt to Income Ratio
- Credit Scores
The housing allowance does not limit VA loan approvals, but it is part of several factors above. Although many think of debt to income ratio as a mortgage qualification requirement, VA loans put an emphasis on residual income. Residual income is determined by subtracting a buyer’s expenses from the gross income. The difference is considered the residual income. Expenses include monthly debt payments, alimony or child support, income taxes, the calculation of utilities (square footage x .14), and childcare expenses. In a moment, we discuss grossing up nontaxable income. Yet, this is not allowed in calculating residual income.
Housing ratio and total debt to income ratios are still important. A housing ratio is the subject home’s total monthly payment including principal, interest, taxes, and insurance divided by the gross monthly income. Although there is not usually a maximum housing ratio, the percentage does play a role in an approval. Total debt to income ratio is all debts including the new mortgage divided by gross monthly income. It is possible for a military buyer to qualify with up to a 55% or even higher debt to income ratio.
Other VA Loan Factors
A cornerstone of any mortgage loan is credit history. The credit history plays a role in how much a buyer may qualify for and forecasts the chance of a buyer’s ability to pay on time. For instance, a higher credit score could allow a VA loan approval with a higher debt to income ratio or lower residual income. Therefore, pay attention to your credit score to improve your odds of approval.
Although VA loans are typically a no money down purchase loan, assets may play a strong role in a VA approval. Even if a buyer is not bringing money to closing, as little as two months of projected mortgage payments in the bank may help a buyer receive approval for a higher amount.
Military Housing Allowance is Nontaxable
In mortgage lending, there is a term known as “grossing up.” “Grossing up” occurs when nontaxable income is increased to help a borrower better qualify for a mortgage. So, why is this allowed? Simply put, lenders normally qualify borrowers based on their monthly debt payments compared to their gross monthly income. Notice the word “gross” which means income prior to income taxes. Well, a housing allowance is not typically subject to income taxes. Thus, it is considered a net figure. If the housing allowance is $1,200 per month, that is the amount the service member receives — no tax deductions.
In these cases, a VA mortgage lender is allowed to “gross up” this nontaxable income. Use a higher income figure to come up with a more apples to apples comparison when it comes to calculating debt to income ratio. When using this option, the buyer is qualified on an estimated gross income. This method goes a long way in helping military buyers qualify for buying a home.
Military Housing Allowance Gross-Up Percentage
Each loan type has their own guideline for grossing up nontaxable income such as a housing allowance. VA loans allow a 25% gross-up in this area. For easy math, every $1,000 would mean an extra income of $250 used toward debt to income ratio.
Housing Allowance Gross-Up Example
For this example below, let’s assume two separate buyers in the Navy living in zip code 23454 (Virginia Beach, VA). One buyer has dependents, and the other does not. In these cases, the 2019 military housing allowances are $1,878 per month with dependents and $1,458 without. Remember, these are net because there are no income taxes factored out of these figures. Now, lets gross them up by 25%. Notice how much difference there is in the “total income” column for each scenario. An extra $364 or $469 goes a long way in a VA loan qualification!
Basic Housing Allowance in Norfolk / Portsmouth, VA Area
|Zip Code||Dependents||BAH||Gross Up %||Gross Up Amt||Total Income|
Super Secret Military Housing Allowance Qualification Tool!
Okay, this is not a secret, but it is a VA lending tool which escapes many lenders. As mentioned above, it is standard to gross up nontaxable housing allowance by 25%. What if that is not enough? Sometimes, a little extra income is necessary for loan approval. That’s where this little-known tool comes into play. It is called a dollar for dollar gross-up of nontaxable income. In many cases, the allowed gross-up exceeds 25%! In simple terms, it means using a higher income for VA loan qualification and a buyer may qualify for a higher price and payment.
Let’s say a buyer is not pre-approved for a certain price because the debt to income ratio exceeds the limit by a little bit. This potential extra grossed up percentage could be the difference in denial and VA loan approval. Want to see how this helps? Contact one of our VA loan experts now.
Can I Gross-Up Other Income Types?
Absolutely! Besides a military housing allowance, VA loans will gross up other non-taxable forms of income. Thus, the same rules we have mentioned above apply to other nontaxable income, which means grossing up by 25% or even more when using the dollar for dollar grossing up tool.
Nontaxable Income Types
- Social Security Income
- Nontaxable Pension
- Disability Income
- Child Support
- Pastoral Housing Allowance
The income types above may be grossed-up as long as they are not taxed. Keep in mind that social security income is sometimes taxable.
Additional VA Loan Tools
Grossing up income is not the only tool offered to help buyers qualify for a VA loan. VA loans have flexible guidelines when it comes to the following:
To learn more about each, click on the links listed above.