Alabama First Time Home Buyer Guide

For first-time home buyers in Alabama, where the median home price was $276,400 as of January 2025, navigating the housing market can be challenging. Fortunately, a range of state, local, and federal programs offer financial assistance, including down payment grants, low-interest loans, and tax credits, to make homeownership more accessible. Let’s consider Alabama’s key first-time home buyer programs, provides reference links, and includes two case studies to illustrate their impact.

Statewide First-Time Home Buyer Programs

1. Alabama Housing Finance Authority (AHFA) Step Up Program

The AHFA’s Step Up Program is designed for moderate-income first-time and repeat home buyers who need help with down payments. It offers a 30-year fixed-rate mortgage (FHA, VA, USDA, or HFA Advantage conventional) paired with up to $10,000 or 4% of the purchase price (whichever is less) in down payment assistance via a 10-year second mortgage at 3.5% interest. Eligibility includes:

• Household income at or below $159,200.

• A minimum credit score of 640 (680 for HFA Advantage loans above 80% AMI).

• Completion of a homebuyer education course.

• A debt-to-income ratio of 45% or less.

The Alabama home loans are serviced by ServiSolutions, requiring only one monthly payment. More details are available at AHFA Step Up Program.

2. AHFA Affordable Income Subsidy Grant

This grant assists low-income buyers (up to 80% of AMI) with closing costs when using an HFA Advantage conventional loan. It provides 0.5% to 1% of the loan amount, depending on income, and can be combined with the Step Up Program. Requirements include a minimum credit score of 640 and a debt-to-income ratio of 45% or less. Learn more at AHFA Affordable Income Subsidy Grant.

3. AHFA Mortgage Credit Certificate (MCC)

The MCC offers a federal tax credit of up to 50% of mortgage interest paid annually, capped at $2,000, reducing tax liability and increasing buying power. It can be combined with the Step Up Program and the Affordable Income Subsidy Grant. Eligibility requires:

• Being a first-time home buyer or purchasing in a targeted area.

• Meeting income and purchase price limits.

• Completing a homebuyer education course.

Visit AHFA MCC Program for details.

4. Alabama First-Time and Second Chance Home Buyer Savings Account

This program allows single taxpayers to deduct up to $5,000 and married couples up to $10,000 annually from state taxes for contributions to a savings account designated for down payment and closing costs. Earnings are tax-free if used for home purchase. Find more information at Alabama Department of Revenue.

Local Alabama First-Time Home Buyer Incentives

1. City of Birmingham Ready to Own Program

Birmingham offers up to $10,000 in down payment and closing cost assistance for first-time buyers (no home ownership in the past three years). The property must be within city limits and serve as the primary residence. Income limits apply based on HUD guidelines. Details are available at City of Birmingham Ready to Own.

2. City of Mobile First-Time Home Buyers’ Program

Mobile provides up to $15,000 for down payment and closing costs, forgiven after five years of residency. For “blighted” properties, assistance increases to $15,000. Applicants must complete a homebuyer education course and meet income requirements. Learn more at City of Mobile First-Time Home Buyers.

3. City of Huntsville Down Payment Assistance Program (DAP)

Huntsville offers up to $10,000 for down payment and closing costs for income-eligible first-time buyers. The property must be within city limits, and applicants must complete a homebuyer education course. Visit City of Huntsville DAP for more information.

4. City of Opelika Home Buyers Loan Program

Opelika provides grants covering 50% of the lender-required down payment, up to $6,000, with preference for the Jeter Avenue Target Area. Applicants must have an income below 80% of AMI and complete homebuyer training. See City of Opelika Home Buyers Program.

Case Study 1: The Johnson Family in Birmingham

The Johnsons, a couple earning $70,000 annually, sought to buy a $200,000 home in Birmingham. As first-time buyers, they qualified for the AHFA Step Up Program, securing a 30-year FHA mortgage and $8,000 in down payment assistance via a second mortgage. They also received a $2,000 Affordable Income Subsidy Grant for closing costs and an MCC, saving $1,500 annually on taxes. The City of Birmingham’s Ready to Own Program provided an additional $10,000, covering most of their 3.5% down payment. After completing a homebuyer education course, they closed on their home and have built equity for two years.

Case Study 2: Maria Chen in Mobile

Maria, a single mother with a $45,000 income, wanted a $150,000 home in Mobile. She applied for the City of Mobile’s First-Time Home Buyers’ Program, receiving a $10,000 grant for down payment and closing costs, forgiven after five years. She paired this with an FHA loan requiring 3.5% down ($5,250), using the grant and personal savings. The AHFA MCC provided a $1,200 annual tax credit. After completing a HUD-approved homebuyer course, Maria purchased her home, gaining stability for her family.

Alabama’s first-time home buyer programs, from AHFA’s Step Up and MCC to local grants in Birmingham, Mobile, Huntsville, and Opelika, offer critical support for overcoming financial barriers. By combining these with federal options like FHA, VA, or USDA loans, buyers can minimize upfront costs and achieve homeownership. Prospective buyers should contact participating lenders, complete required education courses, and review program terms to maximize benefits.

While Alabama isn’t among the biggest U.S. states, it is one of the states in its region that’s added the highest number of residents over the past decade. In fact, Alabama ranks in the middle among all Southern states when it comes to population increase since 2010.

The state’s population growth has a knock-on effect of forcing the housing market in the state to become more robust and active, and home values have risen as a result. Like the rest of the country, Alabama has been impacted by the coronavirus pandemic, but according to housing experts in the state, buyers will continue to consider their options in Alabama.

For those considering buying their first home, the options, terminology, and decisions to make can seem overwhelming. But first-time buyers in Alabama should know their options, including programs that are designed to make it easier to make a first home purchase. Let’s consider the experience of local Alabama mortgage lenders that offer affordable home loans for first time buyers.

Alabama First-Time Home Buyer Options

Unless you’re flush with cash, you’ll probably need to take out a home loan, better known as a mortgage, in order to purchase your first home.

Mortgages are available from a multitude of Alabama lenders, and these types of loan fall into two camps — conventional and government.

Here’s a look at the key differences between the two types of popular Alabama home loans:

Conventional

• Provided by private bank or other lender, not backed or guaranteed by public agency
• Typically allows borrowers to pay less in interest
• Usually requires buyers to make a down payment of as much as 20% and as little as 5%
• Requires applicants to have a solid credit score, usually at least 640; those with higher scores will qualify for lower interest rates

Government-backed

• Issued by a private lender and guaranteed by a public agency; the most common in the mortgage lending space are the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) or U.S. Department of Agriculture (USDA). Income and loan limits and other eligibility rules vary by agency.
• Lower down payment, usually 3.5% for buyers with credit scores over 580, and 10% for borrowers with lower credit scores
• Interest rate is higher than with conventional loan options
• Lower credit score required, though borrowers with scores below 580 typically have to make larger down payment
• Check the FHA loan limits for 2022

Repayment options

A 30-year mortgage is intimidating, but it’s still the way that about 90% of Americans buy their homes. However, there are other popular loan types that are ideal for specific buyers.

ARM: A mortgage in which the interest rate the buyer pays varies throughout the term of the loan, and the specific terms vary. These types of loans are ideal for buyers who will be able to pay off the loan in full before the rate adjusts or those who intend to sell the home before the rate adjusts, though if this is your plan, be sure to go with a lender that does not apply a penalty for doing so.

5/1 ARM: This is one of the most popular types of ARM loans in which the buyer pays a fixed rate for the first five of the 30-year term. After the first five years, the rate adjusts annually, hence the 5/1 name. Similar ARM loans come in terms like 5/5 in which the rate adjusts every five years after the first five. Generally, interest rates within these mortgages tend to adjust upwards instead of downwards, though this depends on broader economic forces, since the interest rates are based on an economic index plus an established margin.

15-year: Some first-time home buyers may be interested in paying off their loan sooner than three decades from now. For those with the funds to do so, a 15-year mortgage is an excellent option, as it gives buyers the chance to save thousands of dollars in interest costs vs. a 30-year mortgage. These types of mortgages have the added benefit of typically being offered with slightly lower interest rates. It’s important to ensure you can afford the higher monthly payment, which will probably depend on the security of your income.

Other terms to know

Specifics related to your mortgage loan aren’t the only considerations to make when deciding on a first home to purchase. Here’s a look at some other terms you’ll need to be familiar with when you purchase your first Alabama home:

Mortgage insurance: Typically, if you make a down payment of less than 20% of the purchase price, you will be required to pay private mortgage insurance until the loan balance reaches 80% of its original value. Lenders are legally required to drop PMI after the borrower reaches 78%, and you can request this if you’ve gotten to that 80% mark and remained in good standing.

Equity: The difference between what you owe on your house and what it’s worth is called equity. If you were to sell your house, the profit you’d make would depend on how much equity you had in the house compared to its selling price. But having a good amount of equity in your home also gives you a degree of financial freedom, and for many homeowners, refinancing their mortgage to take advantage of increased equity allows them to make improvements, take vacations or do other things with the added cash. There are two ways to increase the equity in your home — pay down (or pay off) the loan, and make improvements to the value of the home.

Closing costs: These are one-time fees paid by both buyer and seller, though they vary by location and are typically based on the selling price of a home. In Alabama, buyers should expect to pay between 2% and 5% in closing costs, covering things like inspections, title fees, Realtor commission, and more.

Housing Market in Alabama

Over the past 10 years, Alabama has added more than 100,000 residents, which equates to a growth rate of about 2.5%. While that puts Alabama in the middle of the pack nationally, according to the U.S. Census Bureau, it also means the state ranks near the middle in the South, excluding the huge states of Florida and Texas. All that growth is having a major effect on the housing market in Alabama.

Southern states by population change in numbers, 2010-2020

According to Zillow data, Alabama has had one of the most rapid increases in the median home value over just the past year. So, despite the pandemic, considering a home purchase in Alabama could be an excellent investment.

Top 15 states by year-over-year increase in median home value, 2019-2020

In addition to rising values, market action is heating up in Alabama as well. The state’s largest city, Birmingham, has seen properties remain on the market for less and less time, which makes the metro Birmingham area’s housing market increasingly competitive. In fact, just a couple of years ago, the median time to a pending sale in Birmingham was 26 days; these days, that number has shrunk to just seven — one of the biggest declines among the nearly 100 metro areas with available data.

Percentage change in median days to pending sale by metro area, 2018-2020

While home values vary across the state, most Alabama communities have seen positive growth in this figure over the past half-decade. In fact, of the 500-plus cities and towns with available data, just over a dozen have seen the median home value decrease since 2016. Most of the 25 cities with the highest increase in median home value are in one of the state’s major metro areas.

Top 25 Alabama cities by percentage change in median home value, 2016-2020

Resources for Alabama Home Buyers

There are many programs set up to help Alabama home buyers, and many are designed specifically for those making their very first home purchase. Be sure to explore your options and do the math before you come to a final decision.

Mobile County: Moderate- to low-income first-time home buyers purchasing homes in Mobile County can seek up to $10,000 in down payment assistance in the form of an interest-free deferred loan that’s forgiven if the buyer maintains the home as their primary residence for at least five years. Income limits apply and are revised annually.

Alabama Housing Finance Authority: A pair of state-funded programs can help people purchase homes in the state of Alabama. The Step Up program provides low-interest rate second mortgages to help buyers make down payments on their homes, and income limits apply. Step Up second mortgages have 10-year terms, and buyers can get up to 3.5% down payment assistance on FHA mortgages and 3% on conventional loans. A separate program provides grants to assist with closing costs that vary depending on household income. Borrowers can apply for up to 1% of their mortgage amount as a closing cost grant.

Federal Housing Administration (FHA): Mortgages backed by the FHA and offered through private lenders can help people secure affordable housing, but the agency establishes loan limits that change regularly and vary across the country. In every county in Alabama, the current FHA loan limit is $331,760 for a single-family dwelling.

U.S. Department of Agriculture (USDA): The USDA Rural Development Single Family Housing Direct Loan Program sets eligibility limits for households based on their income. These limits help determine how much financing a family could receive via a direct USDA loan to purchase a home in a rural area or another eligible community. Here’s a look at the limits to be considered a low-income, four-person family in metro areas and non-metro counties in Alabama:

• Anniston-Oxford-Jacksonville: $48,500
• Auburn-Opelika: $61,200
• Birmingham-Hoover: $59,500
• Columbus: $49,850
• Daphne-Fairhope-Foley: $64,800
• Decatur: $50,900
• Dothan: $49,050
• Florence-Muscle Shoals: $51,350
• Gadsden: $49,300
• Huntsville: $68,250
• Mobile: $49,100
• Montgomery: $52,700
• Tuscaloosa: $54,250
• Barbour County: $42,900
• Bullock County: $42,900
• Butler County: $42,900
• Chambers County: $42,900
• Cherokee County: $42,900
• Choctaw County: $42,900
• Clarke County: $42,950
• Clay County: $42,900
• Cleburne County: $43,300
• Coffee County: $53,500
• Conecuh County: $42,900
• Coosa County: $42,900
• Covington County: $43,850
• Crenshaw County: $44,500
• Cullman County: $45,850
• Dale County: $47,600
• Dallas County: $42,900
• DeKalb County: $42,900
• Escambia County: $42,900
• Fayette County: $42,900
• Franklin County: $42,900
• Greene County: $45,200
• Jackson County: $42,900
• Lamar County: $42,900
• Macon County: $42,900
• Marengo County: $42,950
• Marion County: $42,900
• Marshall County: $43,750
• Monroe County: $42,900
• Perry County: $42,900
• Pike County: $42,900
• Randolph County: $42,900
• Sumter County: $42,900
• Talladega County: $44,400
• Tallapoosa County: $45,200
• Washington County: $45,350
• Wilcox County: $42,900
• Winston County: $42,900

VA: Military veterans often use the Veterans Affairs department to help them secure VA home loans, and while the VA does not set a total loan limit that veterans may be approved for, the agency does have limits for the total amount of a loan it will back. This varies by state, and in Alabama, it’s $548,250.

Conclusion

Making your first home purchase can be a rewarding and challenging experience, and it’s understandable to find the process intimidating. But by doing your due diligence throughout the process, you can ensure that your first home is a good investment in your future.

References

• U.S. Department of Agriculture, Rural Development Single Family Housing Direct Loan Program, Adjusted Income Limits. (2020).
• Zillow, Housing Data, Zillow Home Value Index by State and City, Median Days to Pending. (2020).

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