By: FINRA Investor Education Foundation Staff
Although the housing markets have largely recovered from the real estate bust of nearly a decade ago, a Permanent Change of Station (PCS) can still create a hardship for military homeowners who may be underwater on their mortgages (i.e., owe more on their house than they can sell it for). Homeowners who receive PCS orders and believe they may be underwater on their home should ask themselves these questions before trying to sell their homes:
- Can I sell my current home at a price that will pay off my mortgage?
- If not, can I rent my home at a price that will cover the monthly mortgage payments? (See Investing in Real Estate – The Inadvertent Landlord)
- Will I receive a lower housing allowance at my new duty station?
- Will my spouse be able to find a comparable job at our new location fairly soon?
If you answered “no” to any of the questions above, you may be at risk of falling behind when you suddenly face paying for housing costs in two locations. If this describes your situation, you should consider talking to:
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Your lender to see if you can negotiate a loan modification that lowers your monthly payments and makes the mortgage more affordable;
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Your installation’s Personal Financial Managers, as they may be aware of resources and special programs that can help members of the military who have trouble selling their homes; and
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The U.S. Department of Housing and Urban Development (HUD), which has Foreclosure Avoidance Counselors who may also be able to assist you.
While researching housing options at your new location, be sure to do your homework:
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Know your new cost of living. A new location may translate into a higher, or lower, cost of living. Check out the areas you're considering at CityRating.com. Know the Basic Allowance for Housing rates for your new location. Be sure to choose the appropriate “with or without dependents” rate for your situation.
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Determine your housing budget. Calculate how much you can afford to spend on housing. Keep in mind that your housing allowance is tax exempt, a significant advantage over civilian home shoppers—but be careful not to overextend yourself.
- Decide whether to rent or buy. If you plan to stay in your new home for less than three years, it's usually a good idea to rent. If you decide to buy, consider how likely you’d be able to rent the house for enough money to cover your mortgage in a new location if you have to move again, but cannot sell the house. This buy vs. rent calculator may help.
- Check and improve your credit score. Whether you’re planning to buy or rent, your credit score matters. More and more frequently, property managers check the credit of potential renters before offering a rental agreement. And for homeowners, a good credit score can translate into savings in terms of lower interest rates.
A few months before you plan to apply for a mortgage or rental, check your credit report at http://www.annualcreditreport.com/ for any errors. Don't open or close any credit cards right before you apply for a mortgage, and keep your card balances low during that time to help improve your credit score and qualify you for a lower rate. If you're still serving in the military, you may also check with your PFM to access the SaveAndInvest.org myFICO® tool for your free credit score.
- Compare options when buying a home. If you decide to buy, compare any VA loan options you have with other mortgages. The VA loan is one of the few loans with a 0 percent down payment, but you need to be careful that you don't end up underwater if you do end up having to sell your house in the next few years before you’ve had a chance to build equity.
Also compare rates and limits between a VA loan and other loans. Keep in mind that we’re living in a slowly rising interest rate environment, so be sure you appreciate how rising mortgage rates will affect your monthly payment and mortgage products in general.
Don’t let housing become a PCS hardship. Some research and preparation can help reduce the stress of your next move.
For more information about managing everyday finances, visit SaveAndInvest.org.