Find Your Housing Affordability Number to Better Manage Your Debt

By Alecia D. Blair, Military Saves Communications Associate

Housing is probably the largest liability (or debt) you have every month, right? It demands the biggest chunk of your monthly income and can greatly impact how much money you have left to spend on other things, such as everyday expenses, short- and long-term savings goals and paying off other debt. That’s why it’s so important to find your housing affordability number, which is based on a variety of factors. Doing so will help you find not just a house, but a home you can be at ease in.

Every Number is Different

Basic Allowance for Housing (BAH) is a “U.S. based allowance prescribed by geographic duty location, pay grade, and dependency status,” according to the Defense Travel Management Office. As a servicemember, it’s the allowance you receive each month (as noted in your Leave and Earning Statement (LES) to pay for housing.

Whether you’re preparing to PCS, planning a move out of the barracks or across town, you need to know your BAH.  Simply use this BAH calculator and type in the year, duty zip code and rank to find it out. Keeping your housing costs under your BAH, including utilities and other associated costs, if possible, is key to keeping yourself financially comfortable.

Renting Considerations

BAH isn’t the only factor to consider if you’re planning to rent. According to Hands on Banking by Wells Fargo Bank, keep housing expenses under 32 percent of your gross salary—your whole paycheck, including basic pay and BAH before deductions.

To find your “suggested maximum rent,” multiply your gross monthly income by 0.32, according to Hands on Banking. And most definitely keep your rent and other rent-related expenses (utilities, deposits, renters insurance) within this amount and under your BAH.

Buying Considerations

As a general rule of thumb, if you’re planning to buy a home, it is a good idea to have a “housing expense ratio of 28 percent or less,” according to Credit.com. What does this ratio mean to mortgage lenders? “The housing expense ratio,” according to Credit.com, “is an indication of a borrower’s ability to make payments on his or her mortgage loan.”

To find out your housing expense ratio, take your gross monthly income (income before deductions) and multiply it by .28. Try to keep all of your housing expenses (mortgage payment, insurances, taxes) below this number. Example: $4,000 x .28 = $1,120. Before buying a home, take into account these other important considerations.

According to Military.com, another “rule of thumb” to buy by is “that a military family can comfortably afford a home that is up to three times its average annual household income.”

The bottom line: reconcile your BAH with these guidelines to find your housing affordability number and rent or buy with confidence.

Other Resources

http://www.cheatsheet.com/personal-finance/how-much-of-your-money-should-you-be-spending-on-rent.html/?a=viewall

https://usaaef.org/publications-media/articles/u67/should-you-buy-or-rent-with-your-next-pcs#.VeX2nvlViko

https://usaaef.org/publications-media/publications/buying-or-refinancing-a-home#.VeX23flVikq

http://www.militarysaves.org/blog/894-stretch-your-bah-with-these-6-simple-steps

 

 

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