This article has to do with the challenges service members face when trying to obtain a mortgage on a new home purchase as they’re transitioning or retiring from the military. However, this is a topic that I feel other people might be better at addressing than I am. So, for this article, I’ve brought in Jennifer Lear, an attorney and Accredited Financial Counselor. As a financial counselor, Jennifer has worked for 5 years with service members worldwide. Prior to that, she worked as a bankruptcy and family law attorney. She has been an Army spouse for 23 years.
Jennifer’s View on Home Purchases
Jennifer sees a common theme among many service members who retire. They buy a home, often a very large one. Then they retire to that home only to realize that they cannot get a job in the local area. This seems to be a conundrum for retiring service members. They want to purchase a home while they are still on active duty because they have the income to qualify for a mortgage. After retirement, they may face difficulty qualifying for a mortgage. There are a couple of things worth mentioning:
- Buying a big home when your children are teenagers or off to college might sound like a great idea. After all, you’re still going to get use out of it for a couple of years, and your children will come back and visit (especially when they have grandkids), right? Not so fast.
- Buying a home before figuring out the rest of your transition game plan is kind of like telling your child that you’ll pay for them to go to any college they want without considering the price—you might be bound to a commitment that you cannot keep over the long run.
- If you are trying to secure a mortgage, you may have difficulty qualifying if you have just retired or are about to, especially if you don’t have another job lined up, or a second income. Don’t think of this as a bad thing…this is a chance for you to get your ducks in a row.
- If you’re in a position where you’re forced to rent, and cannot buy, think of it as adding flexibility to your transition plan. After all, a 1 year lease is always easier to get out of, or wait out, than a 30 year mortgage. Especially if you’re underwater…the peace of mind alone is worth taking your time here.
- Your first retirement job might be just that – your first one. Many recent retires will accept the first job that comes along because they need the security that a steady income brings. Once they have worked in that position, they may realize they simply don’t like it, or a more lucrative job offer comes along.
The Five-Step Test
To help service members and their families through this decision, Jennifer has a five-step test. This is a series of questions designed to help people really think through their decision before having to make a commitment:
- Do you want to be a landlord? No one who buys a house to live in ever thinks about what it would be like to rent it out. What if you live in Norfolk, and you can’t find a job after your Navy career? If you end up moving to a place like Washington D.C. you might be able to manage a property with a little hustle. But retiring out of San Diego, or Fort Hood, Texas might present logistical challenges.
- Do you have a property management strategy? So answering number one is simple: “Sure, I have no problem renting my house out if I need to.” Have you actually done the math? Do the numbers work? Have you thought about the investment you’ll have to put into keeping a rental property going? If not, you should check out Bigger Pockets, an online community of people whose passion is real estate. For a military-specific perspective, check out Elizabeth Colegrove’s The Reluctant Landlord. BTW: I’ve been there, done that, and have an upcoming article about my story…stay tuned.
- Do you have 10K for an emergency fund AND 10K for a home repair fund? The math might vary from situation to situation. Most financial planners use 3-6 months’ living expenses (not necessarily 3-6 months’ income). However, I do like putting actual numbers into the question. Most people don’t consider how much additional money they need to fund home repairs. Another rule of thumb is to budget 1% of your home’s purchase price for annual maintenance. This does not include renovations which require even more money. If you do not have a significant emergency fund, you might be faced with depleting your home repair fund for non-home emergencies like new tires, expensive vet bills, out-of-pocket dental care, plane tickets, and other expenses.
- Do you have enough money in your budget to pay your mortgage AND pay rent elsewhere if you need to relocate for job purposes? Perhaps you keep your family in the house, but have to take a job that has you commuting back and forth every week. Unless you plan to live in a cardboard box, you’re probably going to have to fork out some money for rent, even if it’s only for a one-bedroom place. Perhaps you rent your house out, and have to downsize. Whatever the plan is, you should have one that allows you to make two home payments…because you could be doing so.
- Do you have an exit strategy, and what is it? Will you have enough equity in the house to cover your closing costs? Will you have enough cash on hand to make necessary repairs and necessary maintenance to sell the house? Are you planning on doing this for 5 years? 10 years? Instead of explaining this, I’ll just use our situation as an example.
Our family’s example
For our home, our exit strategy is simple.
- We have several years’ worth of expenses saved up to get us. This should get us through the first few years of building my financial planning practice.
- My wife also has a job, and we do have our pension, which we’ve budgeted for.
- Since we have children in elementary school, we plan to stay in our home for the next 10 years.
- However, we will eventually downsize to a more manageable place after we no longer need such a big house.
- If we’re forced to sell this house early, there is some equity built into it.
- The mortgage on this house is less than rent on a comparable house. This plan has some risks in it, but there are some backup contingencies built into it.
If you’re buying a home for your transition, you should consider the ‘what ifs’ as much you do into qualifying for your mortgage. Just remember, you get one chance to make your transition. However, you can always look at buying a home once your situation becomes more stable.. Don’t rush into buying a house if it makes sense to wait. You might need to let some of the bigger pieces to fall into place, such as your job situation. As Jennifer likes to tell her clients, “Job first, Home second.”