BAH income can count for a mortgage. Lenders treat the Basic Allowance for Housing as part of military pay, verify it on the service member's leave and earnings statement, and confirm it in the pay deposits. Because BAH is not taxed, most programs let the lender gross it up, as long as the allowance is expected to continue.
Does BAH count as income for a mortgage?
BAH counts as qualifying income on conventional and FHA loans when the service member is receiving it and nothing shows it will stop. Lenders add it to base pay along with other regular allowances. The amount used is the current one, read from the most recent pay statement.
The HUD Single Family Housing Policy Handbook 4000.1 lists the Basic Allowance for Housing by name as military income, along with base pay, clothing allowances, flight or hazard pay, the Basic Allowance for Subsistence and proficiency pay. It tells the lender to use the current amount received and excludes military education benefits.
Active duty, Guard and Reserve
BAH paid to active duty members is the common case. Guard and Reserve members receive it only during qualifying periods of duty, so their allowance may come and go. A lender will want a history that shows how often the borrower is on orders before counting part-time allowances.
Reading BAH on the leave and earnings statement
The leave and earnings statement, or LES, is the monthly pay document that proves BAH. It lists each entitlement separately, so the underwriter can read base pay, BAH and the subsistence allowance on their own lines rather than relying on a total. It also shows the expiration of term of service.
What the underwriter checks on the LES
- BAH amount on the entitlements line.
- Base pay, taxable, shown separately.
- Expiration of term of service (ETS), which HUD says to verify.
- Deductions such as allotments, which may reveal debts or support payments.
HUD adds that if the ETS date falls within the first 12 months of the mortgage, military income can only count if the borrower states they intend to keep serving.
BAH inside military pay deposits
BAH does not arrive as its own deposit. It is paid with base pay as one net military pay credit, usually twice a month, after taxes and allotments come out. A reviewer matches the deposits to the net pay on the LES, not to the BAH line.
A worked example
These figures are examples for one month.
| Item | Monthly amount | Taxable? |
|---|---|---|
| Base pay | 4,200 | Yes |
| BAH | 2,100 | No |
| BAS | 460 | No |
| Total entitlements | 6,760 |
If the net pay after taxes and deductions is 5,620, the statement should show two credits that together come close to 5,620. A gap means an allotment, a split deposit to another account, or a pay change mid-month.
Split deposits
Many service members send part of each paycheck to a second account, such as savings or an account at a base credit union. Statements for both accounts may be needed to see the whole net pay. The LES shows where each part goes, which tells the reviewer which second statement to request.
Grossing up nontaxable BAH
BAH can be grossed up because it is not taxable. IRS Publication 3, the Armed Forces' Tax Guide, lists BAH and BAS among living allowances excluded from gross income. A dollar of BAH therefore buys more than a dollar of taxed base pay, and lenders adjust for that.
How much is added
Fannie Mae's general income guidance allows an addition of 25 percent of nontaxable income, or more when a similar wage earner's taxes would exceed that, if the income and its tax status are likely to continue. FHA caps the addition at the greater of 15 percent or the borrower's prior-year tax rate. Using the example above, 25 percent of 2,560 in allowances adds 640, for 7,400 of qualifying income. For a deeper look at the method, see grossing up nontaxable income.
Other untaxed income in the same file
Allowances are not the only income with odd tax treatment. Borrowers with investment income face different rules in dividend income for a mortgage, and creative or mineral payments follow royalty income for a mortgage. Neither is grossed up the way BAH is.
When does BAH drop out of qualifying income?
BAH drops out when the borrower stops receiving it or is about to. Moving into government housing ends it. Leaving the service ends all military pay. A change of station can change the amount, since BAH varies by duty location, so a lender facing a known move will use the figure for the new station or ask for orders.
Signs a lender will look for
- An ETS date inside the first year of the loan, with no intent to reenlist.
- Orders to a new duty station, or to a location where housing is provided.
- A drop in the BAH line between the two most recent LES copies.
- A separation or divorce that changes the borrower's dependents.
Keeping the record
Military files often carry several LES copies and orders. Lenders must keep them with the loan; loan file retention requirements explains how long. In TrueBankFlow, each monthly total links back to the statement lines behind it, which makes it quick to check two months of net military pay against the matching LES copies.