Don’t Buy A Home When You Leave Active Duty
Over three years ago, I suggested that buying a home on active duty is setting yourself up for financial failure. That post has aged exceptionally well, and now it’s time to double down.
Don’t buy a home as you leave active duty, either. You’re setting yourself up for more financial failure and a heartache with mortgage underwriting.
Instead, wait a year (or two) until you’ve successfully completed your transition.
Servicemembers & families don’t want to read this. I understand. Nobody wants to make an extra move, yet after your transition you might not be done moving anyway.
Even worse, you’ve been waiting a long time for this. You’ve been in the military for years (even decades) and you’re finally getting out. Nobody is going to tell you where to work, where to live, or what to do. You won’t have to move your household goods (yet again). You’re free to live where you want in your “forever home” surrounded by family, good schools, and great neighbors!
I’ve been there too. My spouse and I moved 14 times between our dual-military careers. We’ve filed thousands of dollars of household goods damage claims (and we’ve been reimbursed hundreds of dollars). We’ve had to settle our family in a new town and get our kid into a new school while our new bosses tapped their feet impatiently until we could show up at our new billets.
We understand being homeowners, tenants, and landlords. We’ve rented at eight duty stations. We bought four homes during our careers (because “Real estate always goes up! Right?”) Today we still own two homes on Oahu. (Long story. These photos show our rental property through the years.) We’ve been landlords for over 20 years and we know all about net operating income & capitalization ratios.
More importantly, since 2010 I’ve heard from hundreds of readers who’ve tried to buy homes as they were leaving active duty. Even worse, some of them “succeeded” and are losing thousands of dollars as long-distance landlords– because they’re still moving.
Let’s look at what goes into buying your first home after the military. First we’ll describe all the ways it can go wrong, and at the end of this post we’ll suggest the way to do it with less hassle. I’ve also included some advice on improving the career search.
The myth of the forever home
This is particularly ubiquitous, pernicious, and vicious. We all want to believe that we won’t have to move anymore. Every military veteran and all of their families dream of finally finding their place with the perfect room for everyone (and their favorite furniture). We all want to enjoy everything in our new communities, put down real roots, and watch our grandkids(!) see the bedrooms where Mom & Dad grew up after the military.
We want this because military families move so often. Normal civilians don’t do this, right?
It turns out that civilians don’t move as much as military families, but they still move a lot.
The reality is that over 11% of Americans are still moving every year (even after the Great Recession), and it used to be higher than 15%. Statistically, you’ll move at least once every 6-10 years for the rest of your life. Even if you’re 40-50 years old you still have 3-4 moves left during your life.
Well, surely military families move less after the military, right?
You’d hope so. However IVMF’s 2014 survey of military families indicates that 43% of them stayed in their first civilian job for less than a year. It didn’t stop there: 65% of veterans left that first job within two years. Your chances of picking your bridge career on the first try are only 1 out of 3! Only 40% of military veterans returned to their home of record and another 38% changed their state of residence again since leaving the military. Even worse, the survey indicated that employed veterans changed jobs about every four years.
The worst part of the myth is the unrealistic expectations and self-imposed pressure that it puts on military families. We’re doing it to ourselves and making it feel even worse.
You’ll read about several more obstacles for buying the first homes after the military. Now imagine how much worse those obstacles become if you feel like you have only one chance to get it right.
Let’s make that forever home myth even worse: did you want a job with that?
The job search
I’ll be frank: one of the reasons my spouse and I pursued financial independence so hard is because neither of us wanted a bridge career after the military.
The hardest part of the job search is flexibility, and that sets up homebuyers for failure. Ideally you’d go where the job is: anywhere in America (or overseas!). Employers would contact you for interviews before you started terminal leave.
Yet too many military families want to settle in a particular part of the country. It’s the climate, or it’s near their extended families to help with elders, or it’s just close to your favorite lifestyle near an old duty station.
Let’s get this in the right order:
- When you’re financially independent then you can live where you want.
- If you’re self-employed then you might have a location-independent workflow.
- Until those two things happen then you should live where the money is.
IVMF says that you might only be there for a year or two anyway, so consider it a series of smaller job switches as you move toward your preferred location.
Buying a home adds even more pressure in the job search. You’re already grappling with life’s big questions: What do you know how to do? What do you want to do?! Who do you want to do it for?!? Meanwhile a spouse or significant other is tapping their foot, waiting for you to make up your mind and get a job.
I’ll cut to the chase: start preparing for your next career two years before you leave the military. Assume it’s happening at the end of your service obligation (no matter how hard you study or what your command thinks about that promotion). Assume that your community is downsizing or that you don’t want the next assignment. If you encounter a physical or medical problem then begin working on your next career as soon as you start the evaluation board process.
[The end of this post has a 200-word appendix on the world’s best job-search strategy.]
Optimize your transition by going where the jobs are— or save for financial independence.
Making the move
Congratulations, you’ve found a job and you’re packing up your household goods! You’re all too familiar with that drill.
You could treat this situation like a military transfer: as soon as you know where the job is, you’re going to frantically research neighborhoods and commutes. Once again you’re going to blow into town over the weekend, figure out the schools and the medical care, find a place, and unpack those boxes again.
Let’s hit the “Pause” button on this scenario for a second and ask “Why?”
Why push so hard? Why try to get everything finished before the first day at the new job?
Sure, during active duty everyone had to get settled in the new neighborhood and reboot their lives. The choices were constrained by the base’s location and the commute. The orders were only going to last for a couple of years. You might need to get everything done before the big field exercise or the multi-month deployment.
But this time you’re starting a different life, and you can think differently!
Instead of racing into the new location when you finish your military service, maybe it makes sense to let the kids finish the semester. The new job takes the pressure off the transition fund, and you still have a lot of research to do. Perhaps during terminal leave (or the first few months of your new life) you could send the working spouse ahead to find a small apartment, rent an AirBnB bedroom, or even couch-surf with a friend. You could schedule the household goods packout a little later and do more of your relocation research from your current home. You could send the working spouse ahead a little earlier to search for the family housing before showing up for the job’s orientation week.
There’s another new reason to take your time: what’s your income?
“Applying” for the new home
This move is different because you’re drawing down your transition fund. You might have a few paychecks left on terminal leave but you won’t live on base, and you won’t get a housing allowance. All you have is a confirmation from your new employer that they’ll pay you (in a few weeks).
Military retirees: maybe you have a retiree pay verification letter from DFAS (you printed it out from your online pay account). It promises that you’ll get a pension of about a third of the total compensation you used to earn, and the first deposit should be at the end of the first month of retirement. That first pension deposit could be delayed another month if DFAS has any processing issues with your pay record.
When you find a place to live and fill out the “income” portion of a lease or a mortgage application, you’re in for an unpleasant surprise. As far as the landlord (or the lender) can tell, you’re unemployed. Sure, you have a confirmation letter (and maybe some retirement income), and hopefully your new employer has a good reputation in your new community. Landlords and lenders want to check everything, only this time they can’t easily verify your (new, potential) income. The credit check is only good for the career that you used to have, and so are your tax returns.
The good news is that a landlord is only signing a lease for a year or two. They can work with your employer confirmation and you’ll reassure them with a month’s security deposit.
Getting a mortgage is going to be a little more complicated: a 20% down payment, a 15-year loan (or even longer), and closing costs! This is a long-term commitment to a new residence.
Here’s an ugly truth: you might not get that mortgage anyway. We’ve read dozens of panicked posts on forums and Facebook groups from veterans who’ve been turned down for a loan. They found a place, their offer was accepted, the inspections went well, and everything was moving right along… until the lender balked at their employment letter. Suddenly the seller wants to cancel your contract (because you couldn’t get financing) and move on to the next buyer.
The VA loan financing fee
“No worries, I’ll get a VA loan! The qualification requirements aren’t so strict! I can put less money down, and they understand veterans!”
You’ll learn how the VA loan really works.
First, the VA loan doesn’t come from the VA. They don’t even have a pool of loan money. They just have a bunch of Regional Loan Centers across the country to process your application. The nearest RLC might be hundreds of miles away from your new location.
Second, “your” lender might not understand veterans any better than anyone else. Unless they also have military experience, all they know about a VA loan (and the borrower) is that the VA will guarantee at least 25% of the loan balance if you default. The lender is only willing to work with your employer verification letter because the VA has a fund to cover some of the loan if you go into foreclosure.
Realtors and lenders have slim profit margins, so they want to make their money on volume. The less time (and effort) they spend with you, the sooner they can close someone else’s loan. The good news is that the VA guaranty means the lender can loosen their lending criteria (a little) and they might be able to avoid the dreaded manual underwriting of your application. That moves the loan a little faster.
Third, your chosen home might not pass the appraisal. The VA has strict criteria for “safe and habitable” homes. You might be willing to move into a quaint little fixer-upper because you know how to run a rehab. The VA is not so sympathetic and the appraiser might not be able to work around the stumbling block. The seller of the handyman special (who’s already upset by selling at a huge discount) and their realtor (who knows appraisers) usually have to fix the safety/habitability issues before you can get a loan approval. You can use a VA loan to simultaneously purchase and improve a home (especially if you’re a disabled vet who needs to modify the home), but the loan approval process is significantly more complicated and takes more time.
Yes, you read that right. The vets who need veteran’s benefits the most tend to have a much harder time claiming them. The VA is not big on waivers.
My spouse and I have extensive personal experience with the VA’s criteria and with overzealous appraisers. (I’ll write more when that dispute is resolved.) When you apply for a VA loan you should be much more concerned about the appraiser than about the RLC or the lender.
Finally there’s the price of the loan. When you have a down payment the VA charges active-duty veterans at least a 1.25% origination fee. If you don’t have a down payment then the fee is 2.15%. This helps the VA build the fund that guarantees part of your loan.
- Veterans receiving VA disability compensation,
- Veterans who’d receive disability compensation if they were not already receiving a pension or active duty pay, or
- Surviving spouses of veterans who died in service or from a service-connected disability.
Yet you don’t have a VA disability rating until after you finish active duty.
When you leave the military, you should start your VA disability screening along with the separation physical. The VA’s process is much faster than it used to be, but your rating is only official after your last day of active duty. In many cases it could be weeks or even months after active duty before you receive a disability notification letter.
If you’re trying to buy a home as you leave active duty, you’ll have to pay the funding fee because you don’t meet the waiver criteria. After you obtain your VA disability rating then you can apply for a refund of the fee. First, though, you’ve given away thousands of dollars from your transition fund in the hope of getting it back later.
Add it all up
Here’s what’s at stake when you leave active duty:
- Chasing the myth of the forever home,
- Building a transition fund,
- Finding a job,
- Moving to the new location,
- Having enough income for a lease or a loan,
- Tying up thousands of dollars in a VA loan funding fee.
No wonder military families are so stressed out on Linkedin and Facebook.
When should you buy a home?
Here’s an interesting thought: maybe you should rent for as long as you can.
Financially, it’s hard to buy a home because it’s a terrible investment. The money you’re sinking into maintenance and property taxes could be compounding in a stock index fund at 5% above inflation, while your land is only gaining value at the rate of inflation and your home is constantly depreciating.
Even worse, the emotions of behavioral financial psychology will derail that cold-hearted logic every time. We humans want to own a place where we can feel the illusion of control: no whimsical landlords, no rent increases, and painting the walls any color we want. We still might move every 2-10 years, darn it, but we want to be in charge of that decision.
Here’s the compromise: rent for as long as you can, and buy the home when you have the time to do it right. The downside is that you’ll make an extra move which you might have made anyway.
Renting and then making an extra move is still better than buying a home and moving two years later.
Advantages of renting before buying
When you adopt a renter’s mindset, you remove some of the transition pressure.
You can take the time to make the best choice of the job search, and you understand that it might be 2-3 different jobs before you really settle in to a bridge career.
You can move your family to the new location when it makes sense instead of scrambling to do it all in a week.
Your transition fund lasts longer and you avoid the hassle of applying for a mortgage. If you later decide to buy a home and apply for a mortgage, you’ll have ample documentation of income and your VA disability rating.
Better yet, renting for 12-18 months gives you the time to learn more about your new location while you’re learning how the job will work out. You can research all the neighborhoods and schools. You can watch how the area changes over the seasons and see where the traffic jams are. You can visit open houses every Sunday afternoon to talk with sellers, realtors, and mortgage brokers. You can figure out exactly where you want to live, and what type of place you’d like to live in. By the end of the first year you might also know how the job is working out, and you’ll have the VA disability rating sorted out.
If you’re financially independent (or have enough savings for a “gap year”) then you might not even want a home for a while. You could put your household goods in non-temporary storage and roam the world for a few months– or even years. While you’re on terminal leave (yet still on active duty) you could fly Space A on military aircraft. (Military retirees are also eligible.) You could travel the country for a year or two in an RV while deciding where you’d like to settle. You could travel overseas for months or even years.
But that’s a lifestyle topic for an entirely different post.
Bottom line: simplify your life. Remove some of the transition stress. When you leave active duty, wait at least a year before buying a home.
Appendix: The Job Search
Make your job search easier and faster with these four steps:
1. Read a library copy of the book “The 2-Hour Job Search”.
2. Join the Linkedin group “Veteran Mentor Network”. (There’s a reason it’s one of the largest groups on the site.) Read the posts and apply the recommendations to your own career search.
3. Fix your Linkedin profile. Get rid of the military images & jargon and turn it into the description of your next job. List your achievements instead of your responsibilities. Sign up for your free year of Linkedin Premium (along with every other vet).
4. Once you’ve figured out your target industry and a few corporations, then contact others who are already in that industry and those corporations. (Your free year of Linkedin Premium makes it easier to contact people.) Ask them for a brief informational interview with a phone call or a cup of coffee. They already understand that you’re just learning about their career field, not asking them for a job.
Notice that you haven’t filled out a single resume or application yet? You’ll figure out the resume as you read the book and join the Linkedin group. You’ll only do a few applications, and it’ll be when one of your contacts asks you to interview with them.
Don’t Buy A Home On Active Duty
Book Review: Rent Versus Own
Real Estate: Rent or Buy? (written over seven years ago)
So You Want To Be A Landlord
Why You Should Rent During Retirement/Transition From The Military (Kate Horrell might have said it better!)