BAH: Understanding Locality-based Rates
Basic Allowance for Housing
In addition to regular base pay, eligible active military service members receive allowances each month to assist with the cost of housing, food and other necessities. The Basic Allowance for Housing, or BAH, is meant to offset the financial burden for active service members stationed in duty locations where suitable government housing is not available.
Basic Allowance for Housing rates are updated annually using data for median rent and utility costs. Rental prices are cross-referenced via rental management companies, newspapers and real estate listings.
A service member’s rank, pay grade, number of years in service and family status (single or with dependents) determine his or her monthly disbursement. For example, an officer with dependents will generally receive a higher BAH rate than a single enlisted member in most cases.
Since housing costs can differ so greatly from city to city, location also has a huge impact on rates. It’s important to note that BAH calculations are made according to the location of the service member’s base or duty station, and not the location of his or her primary residence. It’s also important to keep in mind that the allowance a service member receives won’t necessarily cover his or her exact housing expenses.
Let’s imagine an active duty member receives a $1,000 monthly allowance for housing. If he rents a two-bedroom apartment at $1,200 per month, he’ll need to come out of pocket for the extra $200. Conversely, if he decides to rent a cheaper apartment for $800, he’ll be free to reallocate the $200 that’s left over each month. In other words, BAH rates are independent of a service member’s actual monthly housing expenditure.
Many military homebuyers are surprised to learn that Basic Allowance for Housing can be used as effective income when qualifying for a mortgage. Though BAH isn’t disbursed specifically to subsidize house payments, service members can certainly use the allowance to pay a mortgage.
Since BAH is non-taxable, many lenders are actually able to increase the amount they use toward loan qualification through a process called “grossing up” the income. Think about it like this: When a lender is calculating your mortgage affordability, they use your gross taxable income, or your income before taxes, to figure out how much of a mortgage payment you can afford.
If you make $36,000 a year, your lender will list your monthly income as $3,000 on your loan application, even though you’re likely seeing far less than that in your bank account after taxes are taken out.
Since your BAH rate represents the net, or actual, amount you take home each month, lenders add 25% to your qualifying BAH income. A $1,000 monthly BAH can therefore add up to about $1,250 towards mortgage qualification.
From a lender’s perspective, Basic Allowance for Housing is a stable and reliable income source. Although BAH rates are recalculated each year, rate protections help ensure service members aren’t left in the lurch if their regional allowance decreases. Any published BAH increase will still be applied on an annual basis.
As long as the service member doesn’t change his or her dependent status, receive a permanent change of station or reduction in pay grade, lenders can rest assured that BAH won’t decrease year to year.
Basic Allowance for Housing rates are published each January on the Department of Defense website at www.defensetravel.dod.mil/site/bah.cfm.