2023 Alabama First-Time Homebuyer Programs
Coryanne Hicks is a personal finance writer and ghostwriter, and formerly a representative at Fidelity Investments. In addition to articles, Hicks has ghostwritten whitepapers and financial guidebooks for dozens of industry professionals. Her U.S. News & World Report video series on how to start investing at any age won an honorable mention at the 2019 Folio: Eddie & Ozzie awards for best Consumer How-To video. She was also a 2019 SABEW Goldschmidt fellow for business journalists.
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Alabama’s first-time homebuyer programs offer low-interest loans, down payment grants and tax credits designed to help state residents achieve their dream of homeownership. First-time homebuyer programs are intended to make homeownership more accessible, but to qualify, you may need a credit score of 640 or higher and may need to meet certain income limits. We’ll explain the Alabama first-time homebuyer programs and what you need to qualify.
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First-time homebuyer programs in Alabama
First-time homebuyers can find a range of programs to help them with down payment assistance, closing costs and tax credits through the Alabama Housing Finance Authority (AHFA), an agency created by the Alabama state legislature. You can find additional information on first-time homebuyer programs through Alabama’s Department of Housing and Urban Development (HUD) office.
Step Up
Alabama’s Step Up program helps give moderate-income homebuyers assistance with making a down payment. The program provides 4% of the sales price up to $10,000 towards a down payment. Funds are secured by a 10-year second mortgage in addition to a 30-year, fixed rate mortgage. Since both loans are serviced by the ServiSolutions division of AHFA, monthly payments can be combined into one check so it feels like you’re only paying one mortgage instead of two.
Requirements
- Borrower income of $130,600 or less, regardless of household size
- Credit score of 640 or higher
- Debt-to-income (DTI) ratio of 45% or lower
- Must complete a homeownership education course
Pros and cons
| Pros | Cons |
|---|---|
Down payment assistance up to $10,000 Combined first and second mortgage payments | Homebuyers with poor credit won't qualify Income limits |
Affordable Income Subsidy Grant
The Affordable Income Subsidy Grant program provides homebuyers with a grant to help cover closing costs. To qualify, you must earn no more than 80% of the Area Median Income (AMI) for the property’s location. In addition, the amount of the grant varies based on how much you earn: homebuyers earning 50% or less of the AMI limits can qualify for a grant of 1% of the loan amount; while homebuyers earning between 51% to 80% of the AMI are eligible for a grant of 0.5% of the loan amount.
Requirements
- Earn 80% or less of the Area Median Income (AMI) for property’s location
- Credit score of 640 or higher
- Debt-to-income ratio of 45% or lower
- Must complete a homeownership education course
Pros and cons
| Pros | Cons |
|---|---|
Grants up to 1% of loan amount Can be combined with a Mortgage Credit Certificate | Income limits Grant amount depends on income level Credit and DTI requirements Must apply through a participating lender |
Mortgage Credit Certificate (MCC)
The MCC program provides a tax credit to lower your federal income taxes, leaving you with more income to qualify for a mortgage. These savings can come through a larger federal tax break or tax refund, or you can update the withholdings on your W-4 form. MCCs can be combined with conventional fixed-rate, FHA, VA, Rural Development or privately insured mortgages, as well as the Step Up program. The mortgage credit rate will be based on the loan amount.
Requirements
- Meet federally established income limits
- Meet federally established sales price limits, currently $381,308 for target areas and $311,980 for non-target areas.
- Must file a revised W-4 withholding form with your employer
Pros and cons
| Pros | Cons |
|---|---|
Tax credit up to 50% of mortgage interest per year, up to $2,000 annually Dollar-for-dollar reduction in federal tax liability Can be combined with other mortgages and Step Up program Immediate savings option through withholding adjustments | Income limits Sales price limits |
Down Payment Assistance Program
For homebuyers shopping within the city limits of Huntsville, Ala., the Down Payment Assistance awards qualifying first-time homebuyers grants for down payment and closing costs. Maximum amounts vary depending on the home type: up to $7,500 on an existing home or $10,000 for new construction. This assistance is treated like a 0% interest second mortgage with no monthly payments that is forgiven over a five-year period at 20% per year, meaning that you’ll need to live in the home for five years to receive full forgiveness.
Requirements
- First-time homebuyer or not owned in previous three years
- Home must be within Huntsville city limits
- Household income at or below 80% of AMI based on family size
- Must meet lender credit requirements
- Must be for a home you plan to occupy, not a business, commercial or rental property
- Complete a homebuyers education course
Pros and cons
| Pros | Cons |
|---|---|
Up to $10,000 in down payment assistance Full-forgiveness, 0% interest loan | Must live in the home for five years to get full loan forgiveness Six week processing time Only homes within Huntsville city limits qualify Must contribute at least $500 in the transaction |
Alabama first-time homebuyer qualifications
The qualifications for one of Alabama’s first-time homebuyer programs depend on the program and type of assistance, but here’s an overview of what you can generally expect from the process.
→ 1. Review income and credit requirements. Check the income and credit requirements of the program you are interested in to make sure you qualify before applying. If you’re applying for a Mortgage Credit Certificate (MCC), you’ll also need to make sure the sales price on your target home is within the federal limits.
→ 2. Find a lender. AHFA does not lend to borrowers directly. If you’re interested in one of their programs, you’ll need to work with a participating lender who will walk you through the application process.
→ 3. Apply to local programs. The application process varies depending on what type of assistance you’re seeking. For first-time homebuyer down payment assistance only, for instance, you’ll work directly with the program. However, if you’re combining the aid with a loan, you’ll apply through the program’s participating lenders.
→ 4. Attend a homeownership education course. To qualify for down payment or closing cost assistance, you’ll need to attend a program-approved homeownership education course.
→ 5. Be aware of program guidelines. Some programs have requirements after you close on the home. For example, if applying to the Down Payment Assistance program, you’ll need to live in the house for five years to receive full loan forgiveness.
Understanding Alabama first-time homebuyer down payment assistance
Alabama first-time homebuyer programs offer down payment assistance in several forms. You may be able to mix and match these options to meet your homebuying needs:
Deferred second mortgage
A deferred second mortgage, also called a “soft second,” is a subordinate mortgage used to cover down payment and/or closing costs on a primary mortgage. These generally do not add to the cost of owning the home as borrowers don’t have to make payments until and unless they sell their home or refinance their primary mortgage.
Forgivable second mortgage
Second mortgages can also be forgivable over a specified period of time. An example of this is the First-Time Homebuyer Down Payment Assistance program, which forgives the loan at 20% per year over a five-year period.
Grant
Home grants, unlike second mortgages, do not need to be repaid or forgiven. These programs provide homebuyers with funds to pay for closing costs and down payments, often as a percentage of the principal loan amount. The Affordable Income Subsidy Grant, for example, provides 0.5% to 1% of the loan amount based on AMI limits.
Mortgage credit certificate
A mortgage credit certificate helps you lower the cost of homeownership by lowering the amount of taxes you pay on your ordinary income. Savings can be through a tax credit, tax refund or applied immediately through updating your W-4 withholdings. Alabama’s Mortgage Credit Certificate (MCC) program provides 20% to 50% of the loan amount.
THINGS YOU SHOULD KNOW
First-time homebuyer programs often have income limits. Alabama’s Department of Housing and Urban Development (HUD) establishes these limits and bases them on the median income for a specific area. You can find the income limits for your area by entering your county in HUD’s income limit database.
How much of a down payment do I need to buy a house in Alabama?
Homebuyers in Alabama who qualify for USDA or VA loans can purchase a home with no down payment. Other homebuyers can find low down payment options and assistance programs, such as the Alabama Step Up program, which provides assistance of up to 3% of the purchase price of a 10-year, second mortgage.
Can I qualify for down payment assistance in Alabama?
To qualify for down payment assistance in Alabama, you must meet certain income and credit requirements. Some programs, such as the Huntsville Down Payment Assistance Program, are only available on homes purchased within a specified county. Approval for these programs is also subject to the availability of funds.
How do I apply for Alabama first-time homebuyer down payment assistance?
To apply for Alabama first-time homebuyer down payment assistance, you’ll need to find a participating lender since AFHA does not lend to borrowers directly. Your lender will walk you through the application process for the specific assistance program you’re targeting.
Other first-time homebuyer loan programs
Conventional loans
Conventional loans are mortgages that are not guaranteed or insured by the government. As such, they can have stricter qualification standards. However, there are conventional loan programs that offer flexible qualification standards and have low down payment requirements, such as the Fannie Mae HomeReady® and Freddie Mac Home Possible® loans.
FHA loans
FHA loans are government-backed mortgages guaranteed by the Federal Housing Administration (FHA). First-time homebuyers often like FHA loans for their more lenient credit requirements and low down payment minimums. You can qualify for an FHA loan with a 3.5% down payment if you have a credit score of 580 or higher. Lower credit scores may also qualify for an FHA loan, but you can anticipate making a down payment of 10%.
VA loans
VA loans are government-backed mortgages guaranteed by the U.S. Department of Veterans Affairs (VA). These loans are only available to eligible current and former service members of the military. They provide 100% financing — which means no down payment required — with no loan limits and flexible credit requirements. While there is no mortgage insurance, borrowers are charged an upfront funding fee.
USDA loans
USDA loans are government-backed mortgages guaranteed by the U.S. Department of Agriculture (USDA). Your home must be in a designated rural area to qualify, but the loans are available to low- and moderate-income homebuyers and don’t require a down payment.
What are the best first-time homebuyer loans?
First-time homebuyers in Alabama have many loan choices. Here is a summary of the best first-time homebuyer loans and programs available in the state:
| Program name | Assistance amount | Assistance type | Where it’s available |
|---|---|---|---|
| Step Up | 4% down payment assistance up to $10,000 | 30-year, fixed-rate mortgage combined with a 10-year second mortgage | All counties |
| Affordable Income Subsidy Grant | 0.5% to 1% closing cost assistance, depending on income | Grant | All counties |
| Mortgage Credit Certificate | 20%, 30% or 50% mortgage interest tax credit, depending on loan amount | Tax credit | All counties |
| First-Time Homebuyer Down Payment Assistance | Up to $10,000 down payment assistance | 0% interest second mortgage | City of Huntsville |
Home price trends in Alabama’s major areas
Home prices in Alabama rose in 2022. According to data from the National Association of Realtors (NAR), higher mortgage rates caused average monthly mortgage payments in Jefferson County to rise by $441, an increase of almost 62%. The median home price in the county in the third quarter of 2022 was $222,713, up from $207,455 at the end of 2021, a 7% increase.
In Mobile, price increases were more modest but still significant with a 6% increase in the median home price between the end of 2021 and the end of 2022 as prices rose from $171,399 in 2021 to $182,302 in 2022. Monthly mortgage payments also increased by nearly 60%, from $595 to $944.
Is there a first-time homebuyer tax credit in Alabama?
The Mortgage Credit Certificate (MCC) is a first-time homebuyer tax credit available to Alabama residents who meet federally established income and sales price limits.
What are the current mortgage rate trends in Alabama?
Mortgage rates and home prices are on the rise in Alabama. Monthly mortgage payments rose by around 60% in many major metropolitan areas, including Mobile County (59%), Montgomery County (59%), and Jefferson County (62%). In Jackson County, monthly mortgage payments rose from $426 to $698 over the past year, nearly a 64% increase year over year.
