The first—and most important—step to buying a house in Alabama is taking a look at your finances and evaluating where you stand. Without understanding your credit score, debt-to-income (DTI) ratio, and the fees that come with buying a house, you won’t have a realistic idea of what you can afford.

This means that before you can seriously start looking for a house in Alabama, you’ll need to gather all your financial documents, grab your calculator, and start crunching the numbers to figure out your price range for houses in Alabama.

Check your credit score

Your credit score is one of the most important parts of buying a house. This means that it's the first thing you should check when you are determining your financial situation.

To qualify for a conventional mortgage in Alabama, your credit score should be 620 or higher. If you have a lower score, you still have two main paths toward homeownership. These are:

Building your credit: You may want to take the time to increase your credit score so that you can qualify for a standard mortgage, especially if you are still working on saving up for a down payment.

Choosing a low-credit loan: The Federal Housing Administration (FHA) and Veterans Administration (VA) both offer low-credit mortgage options to homebuyers in Alabama. You can qualify for an FHA mortgage with a credit score as low as 530. The VA offers mortgages for those with a credit score as low as 500, but low-credit loans from the VA are only available to active military members and veterans.

Calculate your debt-to-income (DTI) ratio

Your debt-to-income ratio—or DTI—is another important indicator of your financial state and shows how much you owe each month compared with how much you earn. To figure out your DTI, add your monthly payments together and divide them by your monthly income before taxes.

Monthly payments you should factor in when calculating your DTI include:

Rent or house payments

Car payments

Credit card payments

Student loan payments

Alimony or child support

When you are looking at your DTI, a lower percentage is better. Ideally, you should be spending less than 36% of your income to pay your debts each month. If your DTI is higher than 50%, it will be difficult for you to buy a house until you decrease your debts or increase your income.

Determine your down payment

The amount you will pay for a down payment is determined by the type of mortgage you are getting. Determining how big of a down payment you can make will help you determine which houses are within your budget.

With a standard mortgage, you are typically required to pay at least 20% of the house’s value. If a 20% down payment is out of reach, an FHA or VA mortgage will both allow you to pay a smaller down payment.

If you opt for an FHA mortgage and have a credit score of 580 or higher, you may be eligible for a down payment as low as 3.5%. If you are an active military member or veteran, you may qualify for a VA mortgage that requires 0% down.

Prepare for closing costs and other fees

When you are determining the amount you can afford to pay for your new house in Alabama, it is important to factor in the closing costs and other fees you’ll face when buying a house.

Closing costs in Alabama typically end up being between 2% to 5% of a home’s total cost and cover a host of fees, taxes, and insurance payments you will have to make as you go through the house-purchasing process. Your closing costs will generally include the following:

Home appraisal fee

Credit report fee

Home inspection fee

Mortgage origination fee

Earnest money (i.e., a good-faith deposit that will go towards your down payment)

Mortgage insurance

Property taxes

Homeowners insurance

According to

Zillow’s Home Value Index

, the average price of a home in Alabama is $186,367. If you are purchasing a home at this price, your closing costs could range from around $3,727 to $9,318.

For moderate-income, low-income, or first-time homebuyers in Alabama who can afford a standard mortgage but need help with the closing costs of their new home, the Alabama Housing Finance Authority (AHFA) offers

closing cost assistance programs

MORE: How to make a counteroffer after a home inspection

Key Takeaway Closing costs include property tax and insurance payments for both your house and your mortgage.

Look for homeowners insurance

While many of the payments that are lumped into your closing costs are one-time fees associated with buying a house, you will continue to pay for

homeowners insurance

year after year.

The national average cost of homeowners insurance is $1,387 per year, which breaks down to $115 per month. However, owning a home in Alabama means that you are required to have hurricane insurance, which can bump your insurance costs to between $1,400 and $1,800 per year.

To get the best homeowners insurance rate, it is important to shop around. It is a good idea to compare quotes from at least three different companies before you choose a policy. Oftentimes, you can get the best rate on homeowners insurance from the same company as your

car insurance

Insurance broker app

Jerry

can simplify the process of shopping for homeowners insurance by finding you competitive quotes from 50+ top companies within minutes.

MORE:

Does car insurance cover hurricane damage?

Key Takeaway Determining all of the costs associated with buying a house is an important first step in

Get preapproved for a mortgage

After you have a good idea of how your finances stack up, you’ll have to get preapproved for a mortgage before you are ready to start touring houses.

Without a preapproval letter, some sellers won’t agree to have you come to see their home at all. Even if a seller doesn’t require it, being preapproved for a mortgage puts you in a better position to negotiate prices.

To get mortgage pre-approval, you will need to do three things:

Provide your social security number to the lender

Provide information about your employment history, assets, debts, and bank

Fill out a mortgage application

While the pre-approval process is not difficult to navigate, it’s important to wait until you are ready to buy a house to apply for a mortgage.

To verify your eligibility, a lender will take a look at your DTI and do a hard credit check. This type of credit check could have a negative impact on your credit score and make getting a loan or mortgage harder in the near future.

How to pick the right mortgage in Alabama

When you are trying to find the right mortgage, you’ll want to take a look at the mortgage term and interest rate options that are available in Alabama.

The mortgage term is how long you have to pay back the loan on your house and typically is either 15 or 30 years. 15-year mortgages have higher monthly payments but lower interest rates while 30-year mortgages will require smaller payments each month but have higher interest rates. Your interest rate will be around 2.5% for a 15-year term and 3.5% for a 30-year term.

To determine the best mortgage term option for your home, shop around and use loan comparison tools to see how each repayment schedule will work.

Look for a house

Once you’ve done the work to understand your financial power and have gotten preapproved for a mortgage, you are finally ready to start your Alabama house-hunting journey!

Pick your city and neighborhood

First, you’ll want to narrow down which part of Alabama you want to live in, what city you want to be closest to, and what neighborhood fits the cost of living, culture, and lifestyle you are looking for.

Huntsville

Birmingham

, and

Montgomery

have all recently been ranked among the best places to live in the US.

If you already know what city you want to live in and are looking to narrow down your list of potential neighborhoods, you might consider the quality of the school districts, the local entertainment scene, the neighborhood crime rate, and the cost of

car insurance

in the area.

MORE:

Alabama minimum car insurance laws

Buyer’s market vs seller’s market

Another thing to consider while you are looking for a house is whether the market is currently favoring buyers or sellers.

In a buyer’s market, you have more power as a buyer to negotiate down the list price of a house because there are more houses on the market than buyers are purchasing. If you are searching for a house in a seller’s market, houses are in high demand because there are more buyers than available houses.

A good way to figure out whether you are working with a buyer’s or seller’s market is to look at the length of time houses are staying on the market in the area. When houses are spending more time on the market, it’s a good indication that that market is favoring buyers.

If it is currently a seller’s market, you’ll notice a trend of houses being sold for more than the asking price. This is a good sign that multiple buyers were competing for the same house and the seller was able to choose the buyer with the highest offer.

Find a real estate agent

While you can choose to navigate the Alabama real estate market yourself, hiring a real estate agent can make the process way less stressful and confusing.

Having an agent who is familiar with the area you are interested in can make a huge difference in your home buying experience, especially if you don’t currently live nearby. It is important for your agent to work closely with you to understand what you are looking for in a house and be able to communicate promptly and clearly so that there are no mix-ups that can make you miss out on your dream home.

Make an offer

Once you’ve fallen in love with a house and you are ready to make an offer, your real estate agent will help you complete all the necessary paperwork and determine how much money you should offer based on the market conditions and the house itself. When your offer is accepted by the seller and you complete the sale, you can finally start your life as an Alabama homeowner!

MORE:

The best home emergency insurance

How to save on homeowners insurance

Even though it is not the most glamorous part of the home-buying process, buying homeowners insurance coverage is necessary to protect your new—and expensive—purchase.

To make shopping for homeowners insurance a breeze, let the

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FAQs

How much money do I need to buy a house in Alabama?

You’ll typically need 20% of a house’s value up-front as a down payment along with closing costs which can be upwards of 5%. All in all, this means that for a house that costs Alabama’s average house price of $186,367, you want to have around $46,600 saved up if you have a standard mortgage.

If you qualify for a mortgage with a lower down payment, your will need much less money up-front when you go to buy a house. The amount you need is primarily dependent on the value of the house and the type of mortgage you qualify for.

What credit score do I need to buy a house in Alabama?

You should have a 620 credit score to qualify for a standard mortgage in Alabama. However, if your score is lower than this, there are mortgage options available for people with credit scores as low as 500.

Where’s the best place to buy a house in Alabama?

The best place to buy a house in Alabama is the place you are excited to call home. However, if you are looking for the most affordable cities in the state, you may want to consider buying a house in Attalla, Russellville, or Roanoke. If you are interested in living in the most highly-rated cities in Alabama, Huntsville, Birmingham, and Montgomery are worth looking at.

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