Homeownership is part of the American Dream, but achieving this milestone isn’t always easy for military families. The demands of service often create unique financial needs for those who serve our country, and taking on more than you can handle may upset the balance between financial security and financial ruin.
“Buying a home is one of the largest financial commitments most consumers will face in their lifetimes,” said Shiyan Koh of personal finance hub NerdWallet. “It is easy to fall in love with a house without fully thinking through the financial implications of the purchase.”
But that doesn’t mean homeownership is out of reach for military members. Those interested in buying a home can prepare for the biggest financial investment of their lives by proactively managing their credit and fiscal profiles, along with a few other key steps.
In order to obtain approval, as well as the best mortgage terms and interest rates available, veterans and active duty service members alike will need to meet a lender’s minimum credit score requirement. In today’s mortgage environment, VA lenders are typically looking for a score of at least 660. That’s considerably lower than what conventional lenders require, but it can still be a tough benchmark for military members. If you’re not quite ready credit-wise, marshal resources to pay down high-interest debt, scour your credit report for errors and pay everything on time. You can get a free copy of your credit reports at Annual Credit Report.com.
Mortgage preapproval gives veterans a clearer sense of their purchasing power and what they can afford. Working on prequalification and preapproval will also allow you to see how lenders view your credit score. Lenders see a credit score for you that’s weighted for mortgage-related factors, and it can be different from the one you pay FICO or one of the credit bureaus to see. Preapproval isn’t a guarantee that you’ll ultimately obtain a mortgage, but it’s an encouraging sign for both Realtors and home sellers, who’ll often see your preapproval letter as a serious plus.
Speaking of Realtors, it’s also imperative to work with a good one. Their expertise and negotiation experience can help military buyers save a good chunk of change.
“Get a Realtor who you know and trust,” said Aaron of Three Thrifty Guys. “In my experience, the real estate agent never really worked very hard to get me the best possible price as I didn't really know her (she didn't know me well either).”
Military life can be transient and unpredictable, two things that can greatly affect a budget. To ensure that a prospective homeowner will be able to afford their mortgage they need to create a budget focused on minimums. For example, is your family used to a military paycheck and a part-time civilian paycheck? Deployment may forces a working civilian parent to give up their job. If that could be you, create a budget with that only includes the military paycheck.
“Set your monthly housing budget, then add 10 percent,” said Ryan Guina of The Military Wallet and Cash Money Life. “When you rent a home, your landlord is usually in charge of repair costs over a certain dollar amount. That isn't the case when you own your home.”
Stay away from other loans or lines of credit prior to closing on a home. Doing so could compromise the status of your loan. Buy all that new furniture the day after you get the keys, not a week before. First-time homebuyers may also want to consider avoiding any other major financial commitments for the entire first year of homeownership, just to help make sure they’re truly able to meet new obligations and expenses that can come with homeownership.
Homeownership comes with costs that buyers don’t often consider after a life of renting. Property tax, homeowners insurance and general maintenance and repairs are all part of owning a home, and they can heavily tax a family’s budget if they are not properly prepared.
To ensure that a repair doesn’t cost a family to miss a mortgage payment, prospective homeowners should build a savings account that can cover at least three months worth of mortgage payments.
You may not want your first mortgage to be your last. A refinance down the road might help you save a ton of money, depending on the kind of interest rate you locked into on your purchase. Even if it’s a great rate – and they’ve hovered near historic lows over the last couple of years – refinancing into a shorter-term mortgage might make even more financial sense once you’ve spent a few years saving and paying down principal.
“Run the numbers, but a refinance can often mean lower payments as long as rates have reduced,” said David Ning of personal finance blog MoneyNing. “Actually, most people can get a better rate even if rates stay the same because most people can just refinance their 30-year mortgage around the 15-year mark into a 15-year term and be qualified for the lower rate.”