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Updated on Tuesday, March 26, 2019
If you’re into college football or barbecue, or just looking for a place with Southern charm, the state of Alabama likely has something that will make you smile. Alabama may also be a great place to put down roots if you’re planning to buy your first home. The state offers many programs that can save you money from the day you close on your house to the day you finish paying off your mortgage.
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Many first-time homebuyers struggle to come up with enough money to make a down payment. Alabama homebuyer programs not only help first-time homebuyers come up with down payment money, but they also provide a source of funding for closing costs. The state also has a program that offers tax incentives that can make homeownership more affordable for as long as you’re making mortgage payments on the house.
In February 2019, we researched resources for first-time homebuyers who are residents of the state of Alabama. Before you start searching for a real estate agent, here’s what you need to know.
Alabama first-time homebuyer programs
The Alabama Legislature established the Alabama Housing Finance Authority, or AHFA, in 1980 with the mission of helping Alabamians with low and moderate income gain access to housing. The agency has helped more than 70,000 Alabama residents buy a house, whether they were first-time homebuyers or repeat buyers looking to trade up to a home that better served their needs.
If you want to join their ranks, take the time to familiarize yourself with AHFA programs that can help you achieve that goal. To qualify for assistance from the AHFA, you must buy a property in Alabama, and the house must be your primary residence. Other requirements vary depending on the program.
Step Up is a program designed to help first-time homebuyers and repeat homebuyers come up with down payment funds. The program lets borrowers take out a 10-year second mortgage that will cover the cost of the down payment. Since this second mortgage is taken out on top of the 30-year fixed-rate first mortgage, you would be technically taking out two loans.
However, the company that services the loan, or collects the payments, is ServiSolutions, which is a division of the AHFA. ServiSolutions allows borrowers to make a single mortgage payment to cover both loans, which can save borrowers some hassle every month. The Step Up program can only be used with Housing Finance Agency (HFA) loans, which are mortgage products offered by state housing finance agencies.
The Step Up program offers:
- 10-year second mortgage.
- 3% down payment assistance.
To qualify for the program, you must:
- Earn less than $97,300 per year.
- Have a minimum credit score of 620.
- Have a debt-to-income ratio (DTI) of 45% or lower.
- Take a homeownership education course.
- Take out an HFA loan.
How it works
Since the AHFA doesn’t offer loans itself, you must contact one of the lenders in Alabama that participates in the program if you want to apply.
The lender will check your income and credit qualifications to make sure you’re eligible and guide you through the application process. You’ll also have to complete your homeownership education requirements.
Affordable Income Subsidy Grant
Not only is it difficult for some first-time homebuyers to come up with a down payment, but it can be challenging to find money for closing costs, too. The Affordable Income Subsidy Grant gives eligible homebuyers in Alabama a grant of either $1,500 or $2,500 that can be used to cover some of those fees.
Your income determines the amount you get compared to the Area Median Income (AMI), which varies by county and is determined by Freddie Mac. You can check to see what limits apply to your county here. To qualify for the grant, you must apply for a specific Freddie Mac mortgage offering called the Freddie Mac Home Possible Advantage conventional loan.
The Affordable Income Subsidy Grant offers:
- Closing cost assistance in the form of a grant, which means the money does not have to be repaid.
- $2,500 if your income is at or below 50% of the Area Median Income.
- $1,500 if your income is between 50.01% and 80% of AMI limits.
To qualify for the Affordable Income Subsidy Grant, you must:
- Apply for and be approved for a Home Possible Advantage conventional loan.
- Have a credit score of at least 620.
- Have a DTI of 45% or lower.
- Complete a course on homeownership.
How it works
Before you can apply for the Affordable Income Subsidy Grant you must first apply and be approved for a Home Possible Advantage conventional loan. Home Possible Advantage loans let you make down payments of as little as 3%. They also require no reserves, so you don’t need as much money at closing as some other mortgage loan products.
To get started, contact a participating lender. They’ll check your credit to make sure you meet the requirements. Your lender will also check your income to determine how much of an Affordable Income Subsidy Grant you would qualify for.
Mortgage Credit Certificates
The Mortgage Credit Certificate (MCC) program lets you save money in another way. With an MCC, you can get a federal tax credit based on the amount of mortgage interest you paid in a particular year. Depending on your tax situation, that can make a big difference when tax day rolls around. While the program won’t save you money on the day that you close on your house, it could save you money every year that you’re still making mortgage payments on the original loan.
With the Mortgage Credit Certificate program, borrowers get:
- A 20% MCC with no cap if the mortgage loan is for $150,001 or higher.
- A 30% MCC with a $2,000-a-year cap if the mortgage loan is between $100,001 and $150,000.
- A 50% MCC with a $2,000-a-year cap if the mortgage loan is for $100,000 or less.
To qualify for the Mortgage Credit Certificate program, you must:
- Apply and be approved for one of the following types of loans: conventional fixed-rate, Federal Housing Administration (FHA), Veterans Administration (VA), USDA Rural Development, or a privately insured mortgage.
- Meet income limits established by the U.S. Department of Housing and Urban Development. Income limits vary by county and whether the area is designated a target area, which is an economically disadvantaged region. Your lender can tell you whether the address you’re considering is in a target area.
- Meet sales price limits that were established by the IRS. In target areas, the cost of the house can’t exceed $331,423. In non-target areas, it can’t exceed $271,165.
How it works
To qualify for an MCC, you must apply through one of the program’s participating lenders. However, be aware that lenders accept applications on a first-come, first-served basis.
A tax professional can help you make sure the credit is applied correctly when you file your tax return. Generally speaking, the credit reduces the amount in federal taxes that you have to pay by a percentage of your paid mortgage interest. Then, you can still claim the rest of the mortgage interest that you paid that year as a mortgage interest deduction.
National first-time homebuyer programs
One of the best things about Alabama first-time homebuyer programs is that they can be used together. For example, you could use the Step Up program and the Affordable Income Subsidy Grant to help pay your down payment and closing costs. Then you could use the Mortgage Credit Certificate program to get a break on your taxes.
While this is good news to Alabamians who are in the market for their first house, the better news is that there are still other options that might be helpful. See LendingTree’s guide to national first-time homebuyer programs, which you can take advantage of no matter where you live. Homeownership should be accessible to as many Americans as possible, and state and federal agencies are doing their part to make sure that it is.