Using Basic Allowance for Housing (BAH) on VA Loans

Service members can use their basic allowance for housing, or BAH, on VA loans, an incredible financial benefit. In this article, we’ll outline how BAH works and how military members and their families can use it with VA loans to buy a home.

Specifically, we’ll cover the following topics related to BAH and VA loans:

• Basic Allowance for Housing (BAH) Overview
• Using Basic Allowance for Housing to Qualify for VA Loans
• Basic Allowance for Housing and VA Loan Cost of Living Considerations
• Buying a Home with Basic Allowance for Housing
• A Comprehensive Example
• Final Thoughts

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Basic Allowance for Housing (BAH) Overview

Basic Allowance for Housing, or BAH, is a monthly housing stipend provided by the military to qualified service members. Due to the fact that not all military personnel qualify for on-base housing, BAH serves as the mechanism that the government uses to ensure access to quality housing for these individuals.

Broadly speaking, three categories of service members qualify for BAH:

• Single officers and senior enlisted
• Married troops of any rank who don’t live on base
• Troops of any rank who, due to a shortage of on-base housing, are required to live off base

If you fall into any of these categories, you will receive a monthly stipend for housing, with the specific amount linked to your rank and family status (with or without dependents) and adjusted for cost of living changes annually.

And, BAH does not need to be applied to housing.  If you spend less than you receive in BAH on housing costs, you can use the difference for other expenses (or savings).  However, if you spend more than you receive in BAH on housing, you’ll need to pay the difference.

A final overlooked – though extremely valuable – characteristic of BAH is that it’s tax free.  This means that you’ll receive thousands of dollars every year that can be applied to housing and other expenses, and you don’t need to report any of it when you file your annual taxes.

Using Basic Allowance for Housing to Qualify for VA Loans

BAH doesn’t just need to be used to rent a house. Service members can use it to actually buy a home, which, when combined with the awesome purchasing power of the VA loan, provides qualified military members an outstanding housing option.

As a regular, government-provided payment, lenders recognize BAH as an income source, just like W-2 income.  Consequently, military members receiving this housing allowance can use it to qualify for the VA loan to buy a house.

All lenders – VA loan or not – require people applying for a home mortgage to have a minimum debt-to-income ratio, basically saying that how much money you make has to be more than you spend on debt payments (credit card, car loan, etc) by a certain amount every month. In addition to your actual military salary contributing to this income, lenders will include BAH in the calculation.

For service members looking to use the BAH to qualify for a VA loan, this stipend has two benefits – one direct and one indirect.  The direct benefit is that the BAH stipend will likely cover your entire monthly mortgage payment. The indirect benefit, as stated above, is that BAH will boost your income to qualify for a VA loan that you may not otherwise have had enough income for a lender to approve.

Basic Allowance for Housing and VA Loan Cost of Living Considerations

Having outlined the above BAH characteristics, the question remains, how much money will I actually receive every month? 

There’s not one answer to this.  As stated, BAH is pegged to rank and dependent status.  But, it’s also adjusted for cost of living considerations.  The military recognizes that service members stationed in Washington, D.C. or San Francisco will likely have higher housing costs than personnel living outside Minot AFB in North Dakota. As such, the specific amounts a service member will receive depend on his or her duty location (a BAH calculator can quickly provide your specific monthly amount).

The VA loan program recognizes this reality as well. Throughout the country, the VA loan has maximum guaranteed amounts for home mortgages, pegged like BAH to geographic cost of living. So, service members looking to use BAH on their VA loan will see that the two align well, that is, if you can use the VA loan to purchase a home in a certain area, it’s likely that your BAH will also cover your mortgage payments.

Buying a Home with Basic Allowance for Housing

Now that you understand that you can use BAH on a VA loan, the next step is figuring out how to actually buy a house.

While every situation will differ slightly, there are several universal steps that a service member will need to take to buy a house:

• Step 1 – Apply for VA loan pre-approval: Find a military-friendly mortgage lender you’d like to use, and submit all of your financial information to document your income and debt. This is where you’ll show the lender how much you’re receiving every month in BAH.
• Step 2, Find a home: Once you receive VA loan preapproval, work with a realtor to find a home, make an offer, and – once the seller accepts your offer – go under contract.
• Step 3, Close on the home with the VA loan: Once you’re “under contract” with a seller, you’ll need to go through a variety of interim steps (appraisal, inspection, etc). Additionally, this is where your lender will fully approve your VA loan, you’ll sign the closing documents, and the home will be yours.
• Step 4, Use your BAH to pay your monthly mortgage payments: Now that you’ve purchased a home with a VA loan, you can use your (tax free!) housing allowance to make your monthly mortgage payments.

A Comprehensive Example

To tie all of the above together, it helps to provide a real-world example.  Assume Sergeant Smith is married and stationed at Fort Drum, New York.  Here’s how he could use his BAH with a VA loan:

• BAH for an E-5 (with dependents) at Fort Drum: $1,308/mo
• Assumed monthly insurance and property tax escrow amount: $250/mo
• BAH portion applied to mortgage principal/interest ($1,308 – $250): $1,058/mo
• Maximum VA loan amount (3.5% interest, $0 down payment) BAH will cover: $233,500

What this means is that, if Sergeant Smith wanted his BAH stipend to cover his entire monthly mortgage payment, he could afford to buy a $233,500 home with the VA loan.

Final Thoughts

Basic Allowance for Housing is an outstanding resource. The VA loan is also an outstanding resource. Combine the two, and service members have an absolutely incredible financial opportunity. And, as VA loan providers are inherently familiar with both BAH and the military home-buying process, they’ll help you every step of the way.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.