What to know about buying a house in Alabama
Home prices in Alabama, as in the rest of the country, have been rising steeply in recent years. But first-time home buyers can take advantage of special programs to help them get into a house more easily.
If you’re eligible, Alabama offers loans to help you meet your down payment needs. There are also special mortgages, worthwhile tax breaks, and home buyer education courses available. Ready to get started?
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Alabama home buyer overview
In March 2022, the median home listing price in Alabama was $273,800 according to the Alabama Association of Realtors. Statewide, that price was up 18% year-over-year.
Alabama home buyer stats
|Average Home Listing Price in AL||$273,800|
|Minimum Down Payment in AL (3%)||$8,200|
|20% Down Payment in AL||$54,760|
|Average Credit Score in AL1||691|
|Maximum AL Home Buyer Grant2||5% down payment assistance in combined loan and grant. Available statewide through the AHFA|
Down payment amounts are based on the state’s most recently available average home sale price. “Minimum” down payment assumes 3% down on a conventional mortgage with a minimum credit score of 620.
If you’re eligible for a VA loan (backed by the Department of Veterans Affairs) or a USDA loan (backed by the US Department of Agriculture), you may not need any down payment at all.
First-time home buyer loans in Alabama
If you’re a first-time home buyer in Alabama with a 20% down payment, you can get a conventional loan with a low interest rate. And you never have to pay for private mortgage insurance (PMI).
Of course, few first-time buyers have saved enough for 20% down. But the good news is, you don’t need that much. Not by a long shot.
Borrowers can often get into a new home with as little as 3% or even 0% down using one of these low-down-payment mortgage programs:
- Conventional 97 — From Freddie Mac or Fannie Mae. 3% down payment and 620 minimum FICO score. You can usually stop paying mortgage insurance after a few years once you reach 20% home equity
- FHA loan — Backed by the Federal Housing Administration. 3.5% down and a 580 minimum credit score. But you’re on the hook for mortgage insurance until you refinance to a different type of mortgage, move, or pay off your loan
- VA loan — Only for veterans and service members. Zero down payment is required. Minimum credit score varies by lender but often 620. No ongoing mortgage insurance after closing. These are arguably the best mortgages available, so apply if you’re eligible
- USDA loan — For those on low-to-moderate incomes buying in designated rural areas. Zero down payment required. Credit score requirements vary by lender but often 640. Low mortgage insurance rates
- AHFA Step Up program — May include mortgage credit certificates, a competitive rate, and down payment assistance. More information below
Note that government loan programs (including FHA, VA, and USDA home loans) require you to buy a primary residence. That means you can’t use these loans for a vacation home or investment property.
In addition, most programs let you use gifted money or down payment assistance (DPA) to cover your down payment and closing costs. Depending on the mortgage loan you choose, you could potentially get into your new house with minimal cash out of pocket.
If you’re unsure which program to choose for your first mortgage, your lender can help you find the right match based on your finances and home buying goals.
Alabama first-time home buyer programs
The Alabama Housing Finance Authority (AHFA) offers through its Step Up program a 30-year, fixed-rate mortgage to eligible first-time buyers. These loans, AHFA promises, comes with a competitive interest rate and the possibility of down payment assistance (more on that below). Step Up can work with an FHA, VA, or HFA Advantage mortgage.
AHFA may also provide a mortgage credit certificate which can reduce your federal tax burden by up to $2,000 a year, even if you take the standard deduction.
To be eligible for Step Up, you must:*
- Earn $130,600 a year or less
- Have a credit score of 640 or better
- Get your loan through an approved lender chosen from this list
- Complete a homeownership education course
- Have a debt-to-income ratio (DTI) of 45% or lower
- Be a first-time buyer purchasing a new or existing home in Alabama
- Live in your new home as your principal residence, occupying it within 60 days of closing
*Note, criteria were current at the time of writing but are subject to change. Check with an AHFA-approved lender for current requirements when you apply.
To apply, pick an approved lender from the AHFA’s list (link above ) and speak to an agent. They should be helpful and talk you through your options.
Alabama first-time home buyer grants
The AHFA’s down payment assistance (DPA) program lets you borrow up to 4% of the sales price of your new home or $10,000, whichever is less. But this is not a grant or forgivable loan. It’s a second mortgage, and you must repay it over 10 years in parallel with your first mortgage. Your lender will help you make sure you can afford both loans.
Anyone who qualifies for and gets a Step Up mortgage should be eligible for this help. But those on particularly low incomes may qualify for an additional home buying grant, which doesn’t have to be repaid. That’s either 1% or 0.5% of the loan amount, depending on your income. So it’s possible to get up to nearly 5% of your next home’s price through the AHFA.
Buying a home in Alabama’s major cities
Count yourself lucky if you’re an Alabama first-time home buyer who wishes to buy in Birmingham or Montgomery. Those have some of the lowest average home prices in the state. And Birmingham saw its home prices plunge in 2021, while they barely rose in Montgomery. Huntsville’s prices were more in line with the state average.
Birmingham first-time home buyers
In March 2022, the median list price of homes in Birmingham was $160,000. That was a decrease of 11.1% year-over-year according, to Realtor.com.
If you want to buy a home at that median price, your down payment options might fall between:
- $4,800 for 3% down payment
- $32,000 for 20% down payment
The City of Birmingham appears not to currently offer down payment assistance. But you may be able to find help through the Neighborhood Housing Service of Birmingham’s NeighborhoodLIFT program. Check out that link for more details.
Those on modest incomes may be eligible for up to $7,500, matching your savings dollar-for-dollar. This money takes the form of a three-year forgivable loan. Provided you stick by the rules and remain in residence, this debt will be forgiven at the end of the third year. For many, this may be a better deal than the AHFA’s repayable loan.
Huntsville first-time home buyers
In March 2022, the median list price of homes in Huntsville was $300,000. That was an increase of 11.2% year-over-year, according to Realtor.com.
If you want to buy a home at that m median price, your down payment options might fall between:
- $9,000 for 3% down payment
- $60,000 for 20% down payment
The City of Huntsville administers a down payment assistance program. Its website says, “The program provides up to $7,500 towards down payment and closing costs based on each individual homebuyer’s needs. Applicants must meet certain eligibility requirements and be prepared to commit to living primarily in the property for a minimum of five years.”
That sounds a lot like a five-year forgivable loan. But the website doesn’t explicitly say so. So clear that up and get more details from the Community Development Office, 120 E. Holmes Avenue, Huntsville, AL 35801.
Montgomery first-time home buyers
In March 2022, the median list price of homes in Montgomery was $156,000. That was an increase of 4% year-over-year, according to Realtor.com.
If you want to buy a home at that median price, your down payment options might fall between:
- $4,680 for 3% down payment
- $31,200 for 20% down payment
The City of Montgomery’s website mentions in the past tense: “Grant funds have been used to assist very-low, low and moderate-income persons/households by providing much-needed affordable housing and down payment assistance for first-time home buyers.”
But we couldn’t find anything current about down payment assistance on the site. So call City Hall to find out whether a program still exists and, if so, what it offers. The number is (334) 625-4636.
Where to find home buying help in Alabama
In addition to our selection, the U.S. Department of Housing and Urban Development (HUD) provides lists for statewide, regional, and local home buyer resources in Alabama:
Statewide and regional Alabama first-time home buyer programs
- Housing Finance Authority — Low-interest loans and down-payment assistance to low and moderate-income homebuyers
- Habitat for Humanity — Habitat affiliates bring homeownership to very low-income families
- USDA Rural Development — Programs that reduce the cost of homeownership for low and moderate-income families
Alabama affordable housing programs by city and county
- Birmingham Alabama City of Birmingham Dept. of Community Development: (205) 254-2483
- Decatur, Alabama City of Decatur Dept. of Community Development: (256) 351-7754
- Jefferson County Jefferson County Dept. of Community Development: (205) 325-5761
- Huntsville, Alabama City of Huntsville Dept. of Community Development: (256) 27-5400
- Mobile, Alabama Mobile Housing Board: (251) 434-2205
- Mobile County Alabama: (251) 330-1006
- Prichard Housing Authority: (251) 452-8500
- Montgomery, Alabama City of Montgomery Dept. of Community Development: (334) 241-2712
What are today’s mortgage rates in Alabama?
When you’re ready to start the home buying process, make sure you get personalized rate quotes from at least three mortgage lenders.
And don’t just look at advertised rates online; actually apply for preapproval and compare the interest rates and fees you’re offered. That’s the only way to know you’re getting the best deal possible on your new home loan.
1Source: Experian.com 2022 study of 2021 data
2Based on a review of the state’s available DPA grants at the time this was written
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.