08/15/2024
A single E-5, 4 years in, with BAH can easily afford a home in San Diego at $500,000 and under, by themselves. I'll break the napkin math out for you below, but first a word on how the math works:
When us loan officers look at your income, we look at how much you make BEFORE tax, not after tax. So even if you're getting squeezed by the tax man we see the pre-tax income. Another thing is that for BAH and BAS, both are non-taxable. This means that since they are not taxed like your base pay is, we can actually "gross them up" and mark them up by 25%.
For example:
BAH for a single E-5 in the San Diego area is $2964/mo. When we gross it up, it's $3705/mo. Same thing with BAS - for all enlisted ranks, it's 460.25, but when we gross it up, it's 575.31. Using the base pay of an E-5 with 4 years in, we have 3,365.70/mo. In terms of monthly income, an E-5 in this scenario has $7645.31 on paper when qualifying for a mortgage. Effectively, they are making 91,743.72 annually.
If you ask an E-5 you'll definitely hear from them that they don't feel like they make 91k a year because in reality they really don't, especially in this economy! But it's the income we see when qualifying them for a mortgage.
Now let's pick a 2 bed / 2 bath condo here in San Diego. I'm seeing a lot under $500,000, with the lowest at $425,000, which had a price cut of $50,000 just yesterday, meaning the seller is motivated to sell it and get rid of it. The more a house is on the market and sitting empty, the higher chance that you can get it for lower, because the seller is motivated to sell. Let's just pick a house listed at $450,000 for a nice round number.
Ask for seller's concessions. With a VA loan, you can get up to 4% of the loan amount. In this case, you can ask for a maximum of $18,000 from the seller to pay off multiple things, including your closing costs, origination points, inspections, appraisals, and especially my favorite, to buy down your interest rate.
You can use the seller's money to help you save hundreds of dollars a month to buy down your interest rate. You can pay down a max of 2% of the loan amount to decrease your interest rate. I did the exact same thing and I saved nearly $500 a month by doing this on a $715,000 home.
You can also use the seller's concessions to pay off any debt that you may have. If they are offering $18,000 in credits, you can knock out a $7,000 credit card bill and still have $11,000 to apply towards the rest of the cost of the loan.
These two examples not only make it an extremely powerful tool to get into real estate but you benefit from the VA Loan using other people's money, simply by consummating the transaction. Having a seller pay off your credit card or car notes, or buy your interest rate down are insane benefits that shouldn't be downplayed.
Now you've moved in, and you have a 2 bed, 2 bath home at a 5.5% or maybe even better rate, as rates trend downwards. What next? Assuming the property taxes are around $5625 annually and a $200/mo HOA, your mortgage is around $3324. It's a bit higher than your BAH. What do you do?
Get a roommate. You're single anyways. I have three roommates in a four bedroom and they pay for 75% of my mortgage. I'm effectively only paying $1300 a month on my mortgage on a $715,000 home.
If you get a roommate for anywhere from 1000-1300 a month, that offsets your mortgage to anywhere from $2324 to $2024 a month. That's cheaper than rent in most places for a 2/2. You not only own the place and can paint it or change the inside to do whatever you want, you're also not throwing away 100% of your BAH to sleezy corporate landlord or a property management company that ignores you half the time.
You are not only paying yourself by adding to the equity in your home, but the interest and discount points are tax deductible, which can help you get a bigger tax refund at the end of every year. The price of your home will also appreciate, especially here in Southern California. You have a constant influx of not only military personnel who are coming and going all the time, but San Diego is a fantastic market for everything else and is a desirable tourist location too.
If, later down the road, you want to lower your monthly payments, there's always the chance to refinance when rates drop even more. The market sentiment is that they are going to drop at least twice between now and December.
And if you want to buy a house that's a bit more expensive, try buying down the interest rate yourself, then putting more money down or adding someone else who's a service member or a veteran to the loan too, if they have the same mindset that you do.
There are so many ways to make homeownership work for you if you have the right plan. If you need help developing a plan to buy a home, whether you're active duty or a veteran, reach out to me and I will help you figure out how we can work homeownership into your long-term plan.
And remember...
You fought for the American Dream. Now live it!
