First-Time Home Buyer Programs in Alabama 2026
Alabama’s first-time buyer loans come from the Alabama Housing Finance Authority (AHFA) through participating lenders. First Step is a bond-funded 30-year fixed mortgage under HUD income and IRS price limits; Step Up takes incomes up to $172,800. Either adds a 10-year second mortgage: 4% of the sales price, capped at $10,000.
AHFA’s homebuyer page names three programs: “the First Step program, the Step Up program, and the Affordable Income Subsidy Grant.” AHFA does not lend to you directly. The loan comes from a bank or mortgage company on its list. The down payment side of these programs has its own page, Alabama down payment assistance. This page covers the first mortgage, who qualifies for it, and what you sign at closing.
First Step or Step Up: which AHFA loan fits you
Both are 30-year fixed first mortgages, and each can be an FHA, VA, USDA or Freddie Mac HFA Advantage conventional loan. They differ in the limits that decide who qualifies.
| Rule | First Step (Mortgage Revenue Bonds) | Step Up |
|---|---|---|
| Prior ownership | No home owned in the previous three years, unless the property is in a target area | AHFA’s Step Up checklist has no ownership test |
| Income cap | HUD limit for your county, household size and target status | $172,800, “regardless of household size or location” |
| Sales price cap | $566,355 non-target, $692,211 target (effective June 24, 2026) | None listed on the Step Up page |
| Credit and debt | 640 score, debt-to-income 45% or lower | 640 score, debt-to-income 45% or lower |
| Education course | Required (First Step Manual; at least one borrower, before closing) | Required |
| Rate | AHFA calls it “below-market” | A separate Step Up rate, shown under “Today’s Rates” on AHFA’s homeownership page |
For both loans you have to buy a new or existing home in Alabama and move in as your primary residence within 60 days of closing. Refinancing an existing mortgage does not qualify.
The three-year rule behind First Step, and its two ways out
AHFA’s First Step FAQ defines a first-time homebuyer as someone “who has had no homeownership interest in a principal residence in the three years prior to execution of the initial loan application.” Owning a home four years ago does not disqualify you.
- Target areas. A targeted area is “a qualified census tract, or an area identified previously as economically distressed”. It can be a whole county or only part of one. In a target area, repeat buyers are eligible too. AHFA’s Target Area Status Map marks those addresses blue. Where a map area is mixed, AHFA decides, after a Target Map ID Request Form is sent to its compliance staff.
- Veterans. Veterans and their spouses are exempt from the three-year rule, provided the veteran has not already financed a home with a mortgage revenue bond and was not dishonorably discharged. The exemption uses AHFA’s Veterans Exemption Application Declaration Form.
Your ownership history is checked only when you buy in a non-targeted area. AHFA then reviews the loan application (form 1003), a tri-merge credit report and a Drive, Fraud Guard or MERS report.
How AHFA sets First Step income and price limits for 2026
The income limits come from HUD and apply to applications taken as of June 24, 2026. They are set by metro area, and within each area by household size (1-2 people or 3 or more) and by whether the address is in a target area. To take one row: in the “All Other Counties” group outside target areas, the cap is $89,500 for a household of one or two and $102,925 for three or more. The Birmingham-Hoover, Huntsville, Auburn-Opelika, Daphne-Fairhope-Foley, Tuscaloosa and Florence-Muscle Shoals areas have higher figures. See AHFA’s income limit table for the full list.
Only the income of the people on the loan counts. The flip side: only people who sign both the note and the mortgage can be on the title. The sales price limits are set by the IRS and apply statewide. They are $566,355 outside target areas and $692,211 inside them.
The AHFA second mortgage is a loan you repay
On First Step, AHFA offers “down payment assistance up to $10,000 or 4% of the sales price, whichever is lower.” On Step Up, the amount is “4% of the sales price up to $10,000.” Both are secured by a 10-year second mortgage. The First Step FAQ is plain about it: the second “is an amortizing loan with a monthly payment”. It carries the same interest rate as the first mortgage, and you sign a note and mortgage for it at closing. It is not forgivable. AHFA’s servicing division, ServiSolutions, services both loans, so you make one payment a month.
The First Step second cannot be used on its own; it has to go with the First Step first mortgage. You can skip it and bring your own down payment instead. AHFA says it has no minimum required investment from the borrower “for any of its programs.”
The one grant in the lineup is the Affordable Income Subsidy Grant, for closing costs. It is available only on HFA Advantage conventional loans. It pays 1% of the loan amount to borrowers at or below 50% of Freddie Mac’s AMI limit, and one-half percent to borrowers from 50.01% to 80%. Income above 80% of AMI for the property’s county rules it out.
Living in the home, and the recapture tax
AHFA’s FAQ says a First Step home cannot be “rented, leased, quit claimed or interest transferred at any time”. It cannot be an investment, seasonal or vacation property, and business use is not allowed. Because First Step is financed with tax-exempt bonds, a federal recapture tax can apply when you sell. AHFA says the tax depends on how long you lived there, your income at sale and your gain, and that its staff cannot calculate it for you. Refinancing does not get you out of it: a sale “within the first nine years of ownership” still carries the risk.
Getting an AHFA loan through a lender
AHFA’s How Do I Apply page lists its active First Step and Step Up lenders: 79 names on 24 September 2026, each marked for both programs. AHFA also runs a form to match you with a lender near you. One cost is specific to First Step: a commitment fee, wired to AHFA within 72 hours of the loan reservation. It is 0.50% of the loan for a 30-day reservation and 0.75% for 45 days. The second mortgage carries no commitment fee. The FAQ does not say whether the lender or the buyer pays it, so ask for it on your Loan Estimate.
Estimate the payment on both loans with the mortgage calculator. The affordability tool shows how the $566,355 First Step ceiling compares with your budget. Get pre-approved with a lender that appears on AHFA’s list.
Birmingham’s Ready to Own assistance
This is a City of Birmingham program, not an AHFA one, and it covers only homes inside the Birmingham city limits. The city’s Community Development page offers “Homebuyer assistance of up to $10,000” as a “5-year forgivable loan at 0% interest (with restrictive covenant)”. The money can go to the down payment, closing costs or an interest rate buydown. Household income must be at or below HUD’s 80% AMI limit, the minimum credit score is 600, a homeownership course is required, and funds are reserved only after you have a signed purchase agreement. Neighborhood Housing Services takes the intake and runs the course.
Alabama first-time buyer questions
I sold a house two years ago. Can I still use First Step?
Yes, if the new home is in an AHFA target area; outside those areas you need three years without ownership. A qualifying veteran is exempt from the three-year rule anywhere in the state.
Is AHFA’s $10,000 down payment help forgiven?
No. It is a 10-year second mortgage. For First Step, AHFA’s FAQ describes it as amortizing, with a monthly payment at the first-mortgage rate. The Affordable Income Subsidy Grant is the part you do not repay.
Does my partner’s income count if they are not on the loan?
No. For First Step, AHFA counts only the borrowers’ income. The trade-off is that only borrowers can hold title.
What is the most I can pay for a home with First Step?
$566,355 outside target areas and $692,211 inside them, under the limits effective June 24, 2026. These caps apply in every county.
Do I need a homebuyer course?
Yes. AHFA requires homebuyer education for all of its programs, First Step included: at least one borrower must finish an AHFA-approved homeownership course before closing, and the certificate must be dated within one year of the loan reservation. Birmingham’s city program requires one too.