First-Time Homebuyer Programs in Alabama

For first-time homebuyers, the journey to homeownership can be challenging. Luckily, there are options for financial assistance available to ease this process. MoneyGeek’s guide breaks down various first-time homebuyer programs in Alabama to help you choose the best one for your particular needs and situation.

Before buying a home, it’s crucial to consider how much money you can pay upfront. Your down payment impacts the type of mortgage you can qualify for and the amount you can receive from a lender. Generally, a larger down payment results in a smaller monthly mortgage payment.

Many first-time homebuyers struggle with saving for a down payment due to rising costs of living. Thankfully, there are several loan programs designed to help you finance a property. These include down payment assistance, government-backed loans and state-specific first-time homebuyer programs.

Note that federal homebuyer programs are open to citizens or lawful permanent residents of the U.S. However, not everyone can qualify for government-backed loans. For instance, VA loans are only available to military members, veterans and their families. Meanwhile, Alabama homebuyer programs are specific to its residents only.

Ultimately, knowing what financial assistance programs are available to you can be the difference between purchasing a home and waiting for several years to become a homeowner.

A zero-down-payment loan program makes it possible for first-time homebuyers to purchase a house with no money down at closing. There are only two government-backed loans that don’t require down payments: USDA loans and VA loans.

Issued by the U.S. Department of Agriculture, USDA home loans are designed for low- to moderate-income borrowers in eligible rural areas. They offer competitively low rates, and you won’t have to worry about your credit history or a down payment.

There are three home loan programs under the USDA:

• The Section 502 Direct Loan Program offers direct loans to low- and very-low-income applicants.
• The Section 502 Guaranteed Rural Housing Loan assists approved private lenders in providing loans to low- and moderate-income applicants.
• The Section 504 Home Repair program helps homeowners to finance home repairs, improvements and modernizations.

To qualify for a USDA home loan, you need to meet income eligibility requirements based on where you live. In Alabama’s Chambers County, for instance, the direct loan income limit for a low-income household of up to four people is $49,300.

Additionally, the property you plan on purchasing must be 2,000 square feet or less and located in a rural area with a population below 35,000.

VA home loans are backed by the U.S. Department of Veterans Affairs but issued through private lenders. They are mainly restricted to military members, honorably discharged veterans and eligible surviving spouses.

For qualified borrowers, a VA loan is an attractive option due to the advantages it offers over other types of home loans. There’s no down payment, loan limit or minimum credit score requirement. You also won’t need private mortgage insurance (PMI). Plus, VA loans offer competitively low interest rates and limited closing costs.

The VA provides various home loans, including:

• Home purchase loan
• Cash-out refinance loan
• Interest Rate Reduction Refinance Loan (IRRRL)
• Native American Direct Loan (NADL)

Your length of service, duty status and character of service determine your eligibility for a VA loan. You must also have sufficient income, an acceptable credit score and a valid Certificate of Eligibility (COE).

Alternatively, low-down-payment loans can help you purchase a home with less than a 20% down payment. Two home loans with low-down-payment options are conventional and FHA loans.

For many first-time homebuyers, conventional home loans are the most popular financing option. They are funded by private mortgage lenders and often have low rates and wide availability. However, they tend to have stricter lending requirements than government-backed loans.

Conventional loans fall into two main categories:

• Conforming loans adhere to guidelines set by Freddie Mac or Fannie Mae.
• Non-conforming loans exceed conforming loan limits.

It’s possible to qualify for a conventional loan with as little as 3% down, but you will need to purchase PMI to protect the lender in case you default on your loan. You also need a minimum credit score of 620 for a conforming conventional loan or 700 for a non-conforming conventional mortgage. Meanwhile, your debt-to-income (DTI) ratio must be 45% or lower.

FHA loans are provided by private lenders but insured by the Federal Housing Administration (FHA). Compared to conventional loans, FHA loans have fewer restrictions, such as a minimum credit score of 500, maximum debt-to-income ratio of 56.9% and minimum down payment of 3.5%.

However, meeting the FHA’s minimum guidelines doesn't guarantee loan approval. In reality, it can be difficult to get an FHA loan with just these qualifications. Note that having a credit score over 579 will allow you to put 3.5% down, but a credit score between 500 and 579 will require a down payment of at least 10%.

Qualified FHA loan borrowers can choose between 15- and 30-year terms with fixed interest rates and mortgage limits based on your state and county. The Department of Housing and Urban Development (HUD) has an online tool that you can use to find out your maximum loan amount.

If you want to take on a fixer-upper, consider looking into the FHA 203(k) program. Loans under this program allow homebuyers to finance both the purchase and rehabilitation of a house through a single mortgage.

With an FHA 203(k) loan, you are covered for various rehabilitation expenses, such as structural alterations and reconstruction, elimination of health and safety hazards, modernization, reconditioning or replacing plumbing and accessibility improvements. Keep in mind that properties under this program are required by the HUD to meet certain basic energy efficiency and structural standards.

FHA 203(k) loans have similar lending requirements as FHA loans. The minimum down payment required is 3.5% for borrowers with a credit score of at least 580 and 10% for those with credit scores between 500 and 579.

• USDA loans: Make sure that the house you want to purchase is in a rural area with a population of less than 35,000.
• VA loans: The Certificate of Eligibility (COE) is the most important document required in VA loans.
• Conventional loans: You can qualify for a conventional home loan with as little as a 3% down payment.
• FHA loans: FHA loans have some of the most forgiving lending requirements regarding credit score, debt-to-income ratio and down payment.
• FHA 203(k) loans: With an FHA 203(k) loan, you can make property repairs and improvements on a fixer-upper that you purchased.

Aside from federal loans, you can also take advantage of state-specific first-time homebuyer programs in Alabama to achieve the American dream of owning a property.

Step Up is a down payment assistance program from the Alabama Housing Finance Authority (AFHA). It funds down payments that are secured by a 10-year second mortgage and combined with a 30-year, fixed-rate first mortgage.

The AHFA’s Mortgage Credit Certificate (MCC) program allows Alabama homebuyers to receive a tax credit for a portion of the mortgage interest paid each year. They can claim a maximum of $2,000 in credit on their tax return annually.

The HUD provides a resource for several statewide and regional homeownership assistance programs that Alabama homebuyers can qualify for. These include the Affordable Housing Program, Housing Finance Authority, Habitat for Humanity and USDA Rural Development.

MoneyGeek answered some frequently asked questions to guide you on your journey to homeownership as a first-time homebuyer in Alabama.