BAH stands for Basic Allowance For Housing. BAH is a military entitlement service members and some veterans can receive, and the rates are based on local conditions in a specific zip code or zone. BAH is considered stable, reliable income and can be listed on a VA loan application along with base military pay and other allowances as permitted by VA loan rules.

Since BAH is not a flat rate, but determined by local conditions, the amount listed on a VA loan application must be verified according to what the military has established in the housing market where the veteran wants to buy the home.

Lenders have no problem processing the BAH information for a VA loan application, but borrowers sometimes forget an important aspect of BAH–it’s not intended to be used as a mortgage payment, but rather as a way to pay rent. The rental market determines the amount of BAH paid and the rate is adjusted accordingly from year to year.

That doesn’t mean that the borrower should NOT list BAH as income, it also does not mean a VA borrower does something wrong when using BAH money to make a VA loan payment.

But it does mean that the amount of BAH for a given area may not cover the mortgage payment completely–the borrower should expect to pay some money out-of-pocket in such cases. Areas where home prices are high may also have a correspondingly high per-month rental rate, but don’t assume that BAH will always keep up with the amount of the mortgage payments.

Since zip code is a factor in setting BAH rates, borrowers who commute to their military jobs may find the BAH rates for the zip code closest to the base are different than those located further away. What’s the difference–if any–between the rates in your current zip code and the zip code where you’d like to move?

Consider the BAH issue when making your financial plans for a new VA loan application. Once you know how much of a gap exists between what’s covered in the Basic Allowance for Housing and your mortgage payment, the easier it will be to create a budget to accommodate that gap. Some borrowers won’t face a gap at all, others may find one that is quite substantial. You won’t know until you do the math.