How to Buy a House in Alabama: A Homebuyer’s Guide

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Edited byScott Strandberg

Updated: March 31, 2023

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The average value of a home in Alabama is roughly $211K — it has increased by about 16.7% in the past year. Alabama rates are much cheaper than a typical home in the U.S., which has an average value of $365K.

Additionally, Alabama residents spend an average of $1,060 for their monthly mortgage, making it the 16th-cheapest state to purchase a home. While cost is a significant factor in homebuying, you should also consider other variables, such as lender terms.

Understanding the homebuying process can help you efficiently process your application, close a deal and avoid falling into deep debt. In this guide, MoneyGeek highlights the most important basics for Alabama homebuyers.

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Choose an Ideal Location

When purchasing a home, one of the main factors homebuyers usually consider is location. Where you choose to live has a huge impact on the cost of your home and mortgage.

Additionally, you may want to assess your priorities and lifestyle. The location usually indicates the neighborhood culture, cost of living, access to certain amenities and available recreational activities.

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WORK WITH A REAL ESTATE AGENT

The housing market can sometimes get overwhelming, especially with the sheer number of available properties. If you’re looking for the best place to buy a house in Alabama, consider reaching out to a real estate agent. They may be able to accelerate your goal toward homeownership.

If you don’t know where to start, try asking your friends and family for recommendations. Once you’ve created a shortlist, it’s a good practice to request references from recent clients. MoneyGeek also identified the qualities of an ideal real estate agent:

  • Understands the local housing market
  • Has a proven track record of honesty
  • Communicates clearly

At the end of the day, choosing the best real estate agent for you depends on your homebuying priorities.

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CALCULATE THE COST OF LIVING

The cost of living can greatly vary depending on the Alabama city or county in which you live. It’s advisable to evaluate the cost of factors such as:

  • Utilities (electricity, water)
  • Food
  • Auto insurance premiums
  • Medical insurance rates
  • Income, real estate and property taxes
  • Gas or public transportation passes

If you need assistance with your monthly expenses, use MoneyGeek's cost of living calculator to determine how much a typical family may need to live in Alabama.

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CONSIDER AFFORDABLE NEIGHBORHOODS

Fortunately, Alabama is a relatively affordable state to live in. Although it’s a great perk, there are pros and cons of living in a less-costly area. For example, the cost of homeownership is cheaper for individuals who live in a suburban or non-metropolitan location. One downside to this is that social amenities like schools, malls and hospitals may be limited or distant.

According to a study by the Alabama Center for Real Estate, the most affordable metropolitan areas are Gadsden, Florence-Muscle Shoals, Decatur, Anniston-Oxford and Mobile. Meanwhile, the cheapest non-metropolitan areas include the counties of Monroe, Marshall, Walker, Talladega and Cullman.

Calculate Mortgage Rates

The cost of your mortgage heavily relies on several factors, including the lender, your credit score, income, interest rates, loan type, terms, size and more. It’s advisable to balance these factors so you can choose the best mortgage rate for you.

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SEE YOUR MORTGAGE OPTIONS

There are several mortgage types available for homebuyers in Alabama. Different loan types carry different rates, requirements, terms and limits.

To help you narrow down options, you should first check your credit score, employment history, debt-to-income ratio, gross monthly income and more. You’ll need to meet the eligibility requirements of your preferred lender.

Here are the average interest rates for each loan type:

Before you apply for a certain loan type, check if you can qualify. For instance, VA loans only cater to eligible military personnel.

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USE A MORTGAGE CALCULATOR

Computing your mortgage estimate can save you money in the long run. This can help you pinpoint how much it costs to buy a home in Alabama, especially since you can personalize it according to your situation and financial background.

If you’re on the fence about the best loan type for you, check out MoneyGeek’s FHA vs. conventional loan calculator. We dive deep into various tips that can help you discern what kind of loan you need.

Once you calculate all the important numbers, the next step is to find a mortgage lender. If you’re a first-time homebuyer or need housing assistance, you should compare the different lending options in your area.

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KNOW YOUR QUALIFICATIONS

Each lender has its own set of requirements, terms and limits. Hence, knowing your financial profile can help you save time. Mortgage lenders tend to look at the following factors when assessing your mortgage application:

  • Credit score: While not all loan types require this, lenders usually prefer borrowers with at least a fair credit standing.
  • Gross income: How much you earn usually reflects your ability to repay the mortgage.
  • Debt-to-income (DTI) limits: Your DTI ratio shows how much of your income goes to outstanding debts.
  • Down payment: The amount you’re able to pay upfront tells the lender whether or not you’re a risky borrower.

If you don’t meet certain eligibility requirements, you can work toward improving the factors where your application falls short.

Prepare Down Payment Requirements

You typically need to provide a down payment before you can purchase a home. Your rate depends on your loan type since some loans require little to no down payment.

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DETERMINE DOWN PAYMENT REQUIREMENTS

Your down payment depends on the type of mortgage you select. A conventional loan typically has a 20% down payment. Meanwhile, USDA and VA loans have a 0% down payment for eligible borrowers. For FHA loans, borrowers must have at least 3.5% money down.

You can figure out your down payment rate once you know which loans you qualify for. Additionally, your down payment mainly affects your monthly expenses. A higher down payment usually means cheaper monthly payments (and vice versa). If you know how much you need to pay upfront, you can get a rough idea of how much to set aside each month.

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CALCULATE MORTGAGE INSURANCE

Another factor that homebuyers need to consider is mortgage insurance, a feature that protects lenders if a borrower defaults on payments. FHA and USDA loans are programs that require mortgage insurance. Additionally, borrowers paying less than a 20% down payment must have mortgage insurance.

When it comes to conventional loans, you may need to pay private mortgage insurance (PMI) monthly. In some cases, borrowers can cancel their PMI after a few years of timely payments. Thankfully, VA loans don’t necessitate mortgage insurance.

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DOWN PAYMENT ASSISTANCE PROGRAMS

A 20% down payment can be expensive for some homebuyers. Luckily, there are several down payment assistance programs available in Alabama. A few examples include:

  • Step Up: The Alabama Housing Finance Authority (AHFA) helps middle-income homebuyers with their down payments.
  • Mortgage Credit Certificates: Alabama homeowners get a tax credit to decrease the federal tax burden included in their annual mortgage interest payments.
  • USDA loans: The U.S. Department of Agriculture offers loans for single-family housing in Alabama. Borrowers may be eligible if they fall under the low- to very-low-income brackets.

If these options don’t fit your situation, you can explore other housing assistance loans. There are also programs for first-time homebuyers in Alabama.

Get Pre-Approved for a Mortgage

Once you’ve chosen a lender, the next step is to get pre-approved for a mortgage. This step is crucial. Pre-approval allows you to consult the lender about their terms and your budget.

Keep in mind that a pre-approval isn’t the same as a prequalification. When you prequalify, your lender simply provides a loan amount estimate. Meanwhile, a pre-approval typically entails a hard credit check, whereas a prequalification does not.

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GATHER NECESSARY DOCUMENTS

To apply for a mortgage in Alabama, you usually need to submit the following:

  • W-2 forms
  • Tax returns
  • Social Security number
  • Photo ID
  • Investment statements
  • Bank account statements
  • Pay stubs
  • Other mortgage statements

Ask your lender what is needed so you can swiftly gather pertinent documents. You can also inquire about alternatives if you have a missing document.

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TIME YOUR PRE-APPROVAL

When it comes to the pre-approval phase, timing is important. You can speed up your approval process by gathering the necessary documents for your mortgage.

Additionally, your lender’s pre-approval letter usually lasts for around 30 to 60 days. This window is a great time to assess whether there are factors that could increase your mortgage expenses or interest rate or even cause a denied loan. If this applies to you, the 30- to 60-day timeframe allows you to work on those factors.

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RECEIVE PRE-APPROVAL LETTER

A pre-approval letter tells you how much a lender is willing to let you borrow. It also signifies that you’re a serious homebuyer with the financial capacity to take out a mortgage. Although there isn’t a limit to how many pre-approval letters you can request, lenders conduct hard credit checks that can negatively impact your credit score.

A pre-approval letter typically contains the following information:

  • Maximum loan amount
  • Loan type
  • Loan term
  • Monthly mortgage payment
  • Interest rate

However, the contents of a pre-approval letter vary per lender. Certain lenders use the information you provided, while others may ask for supplementary documentation.

Again, a lender’s pre-approval letter is valid for approximately 30 to 60 days. Feel free to use this timeframe to your advantage so you can improve your profile and talk to your lender about what terms work best for you.

Conduct a Home Inspection

Performing a home inspection is vital to the purchasing process. Home inspections conducted by a third-party professional tell you more about the home’s current condition and if repairs are necessary. The homebuyer usually shoulders the cost of a home inspection.

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CONTACT A LICENSED INSPECTOR

Hiring a licensed home inspector can save you money in the long run. While the process can be nerve-wracking, a real estate agent is a good place to get leads. Another option would be to ask trusted friends and family who recently bought a home.

Based on the International Association of Certified Home Inspectors, standard home inspections usually have a written report about the condition of a home’s:

  • Roof
  • Exterior
  • Basement, foundation and crawlspace
  • Heating
  • Cooling
  • Plumbing
  • Electrical
  • Fireplace
  • Attic, insulation and ventilation
  • Doors, windows and interiors

There are also special types of home inspections that examine a home’s foundation, pests or wood-destroying organisms (WDO), mold and sewers.

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FOLLOW ALABAMA-SPECIFIC INSPECTIONS

While a home inspection usually isn’t required, certain Alabama cities or counties may mandate a home inspection before you purchase it. Additionally, there might be additional inspections that your potential home may need to undergo.

Thus, it’s best to ask your home inspector what items they will examine beforehand. This will help you prepare how much you should set aside. On top of hiring a professional, special inspections can range anywhere between $100 and $700.

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GO THROUGH APPRAISAL

A home appraisal is an important step when you’re purchasing a home in Alabama. An expert will assign a dollar value to the property based on its current market value. This can better inform the mortgage company of how much they’re willing to lend a borrower.

During the home appraisal phase, an appraiser will inspect the interior and exterior of your potential home and measure the property’s perimeter. After conducting a physical inspection, the appraiser will give the homebuyer a written report.

Close Your Mortgage Loan

After you’ve thoroughly reviewed the loan terms, you can proceed to closing your mortgage loan. Keep in mind that there are closing costs when you’re purchasing a home. Closing costs are how much you pay the lender for your credit report, appraisal charges and document preparation fee. You may also need to pay third parties for a home appraisal, legal work, pest inspection and more.

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SIGN ALL DOCUMENTS

Preparing your documents for closing can take a good amount of time. Thus, MoneyGeek recommends our readers to complete important documents such as:

  • Homeowners insurance policy: This financially protects you against damages to your home’s physical structure and your personal belongings.
  • Title insurance policy and survey: This ensures that the property isn’t liened and is free to occupy or legally own.

Before you sign any paperwork, be sure to understand its fine print. You may miss small yet important details that end up costing you more long-term. It’s wise to consult an expert or your lender if you encounter unfamiliar terms.

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PAY CLOSING COSTS

On top of your mortgage, you should anticipate the following closing costs:

  • Credit report: A credit reporting agency compiles and provides a borrower’s financial background to a lender, revealing a borrower’s level of risk.
  • Escrow: Lenders set up an account for a borrower’s homeowners insurance, property taxes and private mortgage insurance, if applicable.
  • Prepaid interest: This refers to the interest a borrower pays on a mortgage before the loan term begins.
  • Appraisal fee: The amount you pay an appraiser to assign a dollar value to your potential home.
  • Title insurance premium: This covers the lender in case a property is lost due to legal defects in a property title.
  • Home and pest inspection charges: You sometimes need to hire a licensed home inspector to evaluate a property’s condition.
  • Recording fee: Certain government entities charge a recording fee to file documents that show a borrower’s ownership interest and possible liens on a property.
  • Homeowners insurance: This protects homeowners against damages to their homes and possessions or liability from specific accidents on the property.

Although the list isn’t exhaustive, it offers a rough idea of what you can expect.

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COMPLETE YOUR HOME PURCHASE

To complete the purchasing process, make sure you’ve pinpointed your desired location, computed mortgage rates and prepared the necessary documents. You should have also received a pre-approval letter, undergone a home inspection and closed the loan.

After these steps, you’ve fulfilled your goal of homeownership in Alabama. Congratulations! The next step is to manage your funds as well as your monthly mortgage payments.

Homeownership comes with multiple responsibilities, like saving up for an emergency fund and anticipating home maintenance fees (cleaning, repair and upkeep of mechanical and electrical systems). One way to secure an affordable monthly rate is to pay a larger down payment.

Alabama Homebuying Details

Alabama homebuyers should remember to research their new home’s location, explore different mortgage types and shop around for a lender that fits their needs. Although these are general steps to follow throughout a homebuying journey, there may be processes unique to Alabama. Feel free to contact your lender or a real estate professional so you can prepare for Alabama’s homebuying steps.

Additionally, Alabama residents can seek homeowner assistance programs to help them buy the home of their dreams.

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First-time Alabama homebuyers earning a moderate income who can afford a mortgage but need help with their down payment may be eligible for assistance through the Step Up homeownership program.

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Homeowners can also combine Step Up with an Affordable Income Subsidy Grant to help with their closing costs. Both assistance programs have specific eligibility requirements for Alabama homebuyers and require the completion of a homeowner education course.

Frequently Asked Questions About Buying a Home in Alabama

Buying a home in Alabama is a big step. To guide you through the process, MoneyGeek answered the most commonly asked questions homebuyers need to know. Browse the frequently asked questions below to kickstart your homebuyer journey.

Buying a home is an important step in anyone’s life. Therefore, it’s important to ask yourself a few questions before you begin. Figure out where exactly you want to live, list your priorities for that location and compute your budget.

Homeownership is a huge commitment that entails financial responsibilities. Thus, it might not be for everyone. Purchasing a home in Alabama is generally a good idea when you’re emotionally and financially ready.

In the last year, the value of an average home in Alabama has increased by 16.7%. Its approximate value is now $211K. Purchasing a home in this state can be a wise decision if you’re financially capable. You can determine whether you’re ready by analyzing the credit standing and debt-to-income ratio requirements of mortgage lenders.

The average monthly household income in Alabama is $5,604. You may need more or less income depending on where exactly you choose to live, but this figure provides a good baseline for what lenders will expect.

In Alabama, the average annual property tax is $895, with a typical real estate tax rate of 0.41%.

The cheapest metro areas in Alabama are Gadsden, Florence-Muscle Shoals and Decatur.

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