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Dora Drake
Dora Drake Housing counselor, Tuscaloosa Housing Counseling Program View bio
Brian Hunt Compliance supervisor, Alabama Housing Finance Authority View bio

This guide was written by

Money Geek Team

You want to buy that first house in Alabama, but are you ready? Prospective homebuyers might feel swamped by the mortgage process. This guide can help teach you how to check mortgage rates, get free credit reports and prepare to apply for a mortgage, including where to go for financial help with down payments and closing costs, and find free seminars to learn about Alabama's real estate market conditions.


Understanding Alabama Mortgage Rates

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Interest rates in Alabama are steered by demand for houses in the state and the local economy. But the key factor in the rate you'll get on a mortgage is your credit score. It's free to check your credit scores once a year through the three major credit reporting companies: Experian, TransUnion and Equifax. Learn more about factors that drive mortgage rates.

You're under no obligation when you talk to a lender. Alabama housing experts say it's a good idea to get pre-qualified for a mortgage before working with a real estate agent or going to state agencies like the Alabama Housing Finance Authority for help with down payments and closing costs.


First-Timer? Get Homebuying Help in Alabama

The Alabama Housing Finance Authority (AHFA) offers two loan options for first-time homebuyers. Since 1980, the AHFA has helped more than 105,000 Alabama families buy their first house. The two main programs are:

Step Up

Homebuyers who make less than $97,300 a year and meet credit requirements can qualify for a 30-year fixed interest rate with optional down payment assistance.

Mortgage Credit Certificates

This certificate lowers the federal income tax homebuyers pay, which gives them more income to qualify for a mortgage at the application stage. Borrowers can take a tax credit of up to 50 percent of the mortgage interest paid annually, capped at $2,000 annually. You can either file a revised W-4 withholding form with your employer, which reduces federal tax withholdings and increases your take-home pay, or you can take the deduction once a year on your federal income tax return.

Financial Assistance for First-Time Buyers in Alabama

One of the largest obstacles to homeownership in Alabama is the down payment. The median home value in Alabama is not quite $123,000 so a modest down payment of 20 percent would be nearly $25,000 cash the first-time buyer would have to deliver by closing.

There is good news, though. Several state and federal agencies, including the AHFA and U.S. Housing and Urban Development (HUD), offer loans or grants to help new homebuyers with a down payment. Here's a list of resources for the first-time homebuyer in Alabama:

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Understanding Home Affordability in Alabama

Alabama's economy and housing demand affect real estate prices as well as mortgage interest rates. Both are factors in determining whether you have the income to afford a monthly mortgage payment.

Housing affordability decreased slightly during the first quarter from the prior year's quarter, meaning home buying became financially more difficult based on average incomes in the state. The University of Alabama tracks housing affordability and publishes quarterly reports on the state housing market. Under current conditions, the state median family income of $55,500 is roughly twice the amount needed to qualify for a conventional mortgage on a median priced home.

This is where agencies like the AHFA can help close the gap on down payments and closing costs, which can give Alabamans earning at least the median income level that extra push over the top so they can buy a house and move forward with affordable monthly payments. The median monthly gross residential rent in Alabama between 2010 and 2014 is $715, according to the U.S. Census survey. That's slightly higher than the monthly mortgage payment on a $200,000 house depending on the interest rate of the loan.

How Alabama Mortgage Rates and Home Prices Affect Monthly Payments

Metro Area Estimated Monthly Mortgage Payment* Q3 2019 (Change from Previous Year) 2018 Median Home Price 2017 2016
Birmingham-Hoover $826 $223,200 (+4.6%) $207,300 $197,000 $186,400
Decatur $595 $160,700 (+6.0%) $142,400 $128,500 $129,500
Huntsville $801 $216,300 (+8.0%) $205,400 $189,800 $184,300
Mobile $585 $158,000 (+6.5%) $145,200 $136,800 $132,600
Montgomery $584 $157,800 (+12.6%) $140,900 $137,700 $131,200

Source: National Association of Realtors Q3 2019 Metropolitan Median Area Prices and Affordability report.
*Estimated Monthly Mortgage Payment is based on median home prices for the metro area in Q3 2019, a 20 percent down payment and a 30-year fixed mortgage at 3.75 percent. Figure reflects principal and interest but excludes insurance and property taxes.


Figure Out How Much You Can Borrow in Alabama

Lending limits on FHA mortgage products throughout Alabama are capped at $331,760 for 2020. Here's a listing by locality of FHA and conventional loan limits in the Yellowhammer State:

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Buying a Home in Alabama: What the Experts Know

Dora Drake

Dora Drake is a HUD-certified housing counselor with the Housing Counseling Program of Tuscaloosa.

Brian Hunt is a compliance supervisor for the Alabama Housing Finance Authority.

What do first-time homebuyers often overlook or forget when they start the mortgage lending process?


Two of the most common problems are not knowing how to budget and having an adequate credit history. The problems we see are not necessarily bad credit, but not sufficient credit history to accommodate a mortgage. Sometimes, people don't have any credit.


The down payment is the main thing that holds back a lot of first-time home buyers. Our most popular program is the Step Up for moderate-income home buyers. These are people who can afford a mortgage, but need some help with the down payment.

The down payment is secured by a 10-year second mortgage that's rolled into the loan package for a 30-year, fixed-rate first mortgage. The loans are serviced by a division of the AHFA, so homeowners only need to write one check a month.

As long as you buy and live in a home in Alabama and make less than $97,300 a year, you should qualify. A homeownership education class is also required.

Best advice for people with credit scores on the fence, perhaps not quite good enough to secure a mortgage? What can they do to improve their credit-worthiness to qualify for financing?


Get your free credit reports, and we can help sort through them, help you make an action plan for taking care of problems. We can help you establish a payment plan to bring up delinquent accounts. Other things you can do that make a difference is pay off smaller debts and get them off your report. Establish credit if you have none. One way to build credit and help with your home plans is if you don't have the type of furniture you desire, you could buy one piece at a time with installment payments. We suggest people use their own savings to secure the card and start out with small amounts. Credit repair is not a quick fix. I always say it takes just a minute to get into trouble but a lot longer than that to get out. You'll have to establish a good payment pattern of 12 to 18 months before credit scores will really start to improve.


Since we don't have the ability to originate home loans, we have a network of participating lenders around the state that do that part of the process if someone is interested in using our homeownership programs. They go over things like credit checks, income verification, and determine who they are going to loan to.

Is there adequate inventory in Alabama for first-time homebuyers? Are there enough houses within the price range of your average first-time homebuyer?


It's not a problem with houses being available. We have programs that will fit just about anyone in Tuscaloosa. It's being ready to buy that's the main problem. We have a program that pays $5,000 in down payment assistance and that will soon increase to $15,000. There are plenty of opportunities to buy a home.


For homebuyers with an income range to qualify for our programs, yes, there's houses available. Lower income housing is an issue, but in this case, we're mainly talking about rental housing.


Remember Those Alabama Closing Costs

It might seem like everyone in Alabama gets paid when a buyer closes on a home. Average closing costs in Alabama are about $1,800, according to Bankrate.com. Most of this comes from origination fees charged by the lender, although every individual involved in the sales process also will get a cut. Third-party fees include appraisals, flood certification, title research, and attorney review of documents.

More information on how lenders set closing costs and what you can expect can be found here. Here's a breakdown of average closing costs in Alabama:

Average Closing Costs in the Yellowhammer State

Average Origination
Average Third-Party
Average Total Closing

Source: Bankrate's 2015 survey of closing costs.

Refinancing a Mortgage in Alabama

Alabama mortgage lenders also offer refinancing to qualified borrowers who can take advantage of lower interest rates than those on their current loans. This can both reduce the monthly mortgage payment and save thousands of dollars over the life of the refinanced loan.

The Home Affordable Refinance Program (HARP) offers refinancing programs in Alabama with lending limits set county-by-county, and promises a 48-hour approval process. For a deeper look into mortgage refinancing check out this MoneyGeek guide.

Other Alabama Mortgage Resources

Alabama Housing Finance Authority

The AHFA was created in 1980 to serve the housing needs of low- and moderate-income state residents. AHFA offers affordable financing to first-time homebuyers.

Alabama HUD

State-specific resources from the federal housing department, including information on the home-buying process, mortgage programs for first-time buyers and more.

HUD Settlement Cost Booklet

Information published by the federal housing department on planning for the costs associated with a home purchase in Alabama.

FHA Home Loans Alabama

Educational resources and financing available to Alabama homebuyers from the Federal Housing Agency.

HUD Approved Housing Counseling Agencies

Complete listing of housing counselors available to help first-time Alabama homebuyers navigate the lending process.

Mobile Alabama Homebuyer Grants

Local government resources for homebuyers in Mobile, including information on a grant program for up to $10,000 to go towards a down payment or closing costs.

Down Payment Assistance Programs

Alabama-specific resources for financial help to assist with down payments for first-time homebuyers.

Neighborhood Housing Services of Birmingham

Homebuyer education resources specific to this Alabama city.

Community Development Home Program of Decatur, AL

City program providing financial assistance to qualified low-income families to purchase a home in Decatur with minimum down payments. Decatur pays up to half the minimum required down payment or the entire minimum required closing costs.