Are HOA Fees Covered in Your Mortgage? Learn Exactly How One Affects the Other

You’ve spent months scouring home listings, visiting open houses, discussing floor plans, lot sizes, neighborhood amenities, and most importantly — calculating out your expected taxes, insurance costs, and ideal monthly mortgage payment down to the nearest penny.

It’s been a long process but your hard work has finally paid off. You’ve found the perfect home (or vacation getaway) that’s within your budget and meets all your criteria. Yay! Happy dance time.

But as you dive into the details of the contract, that’s when you see it … the catch.

Your perfect home is part of a homeowners association (HOA) and there’s some mumbo jumbo about having to pay an additional expense (beyond the typical costs of owning a home) known as HOA dues.

Is your HOA fee covered in your mortgage? How does it factor into your overall debt-to-income ratio? And exactly how much of an extra expense are we talking about here?

HOA dues and their relation to mortgages can be puzzling, but these are details you don’t want to skip. To help clear the clutter on this topic, we’re sharing real estate expert advice, insider knowledge, and discussing potential pitfalls to avoid when securing a mortgage for a home with an HOA.

What is an HOA?

An HOA is a non-profit organization within a planned community, neighborhood, or residential building that creates and enforces rules to help maintain the community and keep property values high. If you’re buying property that’s part of an HOA, be prepared to pay a monthly, quarterly or annual fee on top of your property taxes, insurance, and yes – mortgage payment. The association charges these fees, also known as “HOA dues,” to cover the maintenance and upkeep of the community.

Though HOA rules differ, their underlying purpose is to keep the community looking desirable and cohesive — meaning, no lime green exteriors or purple doors allowed (probably). Other common rules can include restrictions on rental properties, holiday decor, parking, and guidelines on lawn maintenance. To learn more about an HOA’s rules and regulations, you can request to see their covenants, conditions, and restrictions (CC&R).

Melissa Tucci, a top-ranked real estate agent with over 18 years of experience selling single-family homes, condominiums, townhomes, and income properties in the San Diego market, advises anyone interested in an HOA property contact the association, review the CC&R, and check into their financial standing first.

“Make sure to look at the rules and regulations and educate yourself. Find out about the reserve, make sure the HOA is well funded, and make sure it’s not in litigation and that there are no lawsuits against the HOA,” Tucci says.

The last thing you want to do is move into an HOA with a dried up reserve or one that’s constantly tangled up in legal matters. But equally as important is clearly understanding the rules and regulations, since certain associations can be more particular than others. Like with pets, for example. Some HOAs have regulations against certain pet breeds, weight restrictions, and caps on the number of animals allowed on each property.

Other unique rules can include things like bans on political yard signs, rules against neighborhood lemonade stands, or having strict policies in place about snow removal (like having to shovel your driveway within 24 hours).

By digging into the details ahead of time, you can avoid finding out the hard way about HOA rules that just don’t fly with you.

HOAs today

HOAs are common in new neighborhoods, with approximately 80% of new builds being part of an association and an estimated 65 million Americans living in such communities. Though HOAs aren’t as popular in older neighborhoods, there are steps residents can take to start one if they’d like to.

For new neighborhoods, developers often establish the HOA shortly after building the community. Once the community grows, they relinquish responsibilities to a group of volunteer community residents who agree to run the association. These volunteers then elect a residential board of directors to oversee managing the community’s finances, keeping up on maintenance, collecting dues, and enforcing rules.

What do HOA dues pay for?

HOA dues help maintain community properties, lawn care, pest control, snow removal, amenities, and shared spaces like pools, parks, and gym facilities. For any unexpected maintenance most HOAs set aside a portion of dues into a communal reserve fund, which acts as an emergency fund for use on big expenses.

The cost of dues can range anywhere from $100 per month to over $1,000 per month depending on the association, but many average closer to $200 to $300 per month. Keep in mind dues can fluctuate based on future budget predictions, unexpected maintenance costs, or good old inflation. To learn about previous fee increase or decrease trends for your HOA, you can request to see the association’s past annual reports.

What an HOA charges primarily comes down to the property type and its offerings. Before purchasing a property, take a good look into exactly what your money will go towards and if what you’d be funding matters to you.

HOA fees and your mortgage

Is your HOA fee covered in your mortgage? While HOA dues aren’t technically included in your monthly mortgage payment, they can affect your ability to qualify for a home. Even though homeowners pay dues directly to the association and not their lender, that doesn’t mean lenders turn a blind eye to this extra financial expenditure.

Jennifer Hernandez, senior loan officer and top producer at Legacy Mutual Mortgage in Houston, Texas, explains how lenders consider mandatory HOA costs.

“We have to take those fees on a monthly basis to use as a person’s payment for qualifying,” she says. “So, it doesn’t matter whether the homeowners fee is paid annually or quarterly, we still have to divide it to get it monthly and use it as a mandatory portion of their debt-to-income calculation.”

Hernandez says this amount is broken down monthly to be part of the underwriter’s review for the buyer’s overall debt-to-income. Since lenders generally look for a ratio of 45% or lower (including your mortgage payment), the extra few hundred bucks in HOA fees can really make a difference. Hernandez experienced one such situation after digging further into the details of a contract and finding an unexpected $2,900 mandatory annual fee.

“We’ve got to catch that kind of stuff upfront because it can make or break,” says Hernandez. “The buyer was on the verge of not qualifying once I put that big fee in there.”

So, say you want to pay your dues upfront for the entire year. That should make a difference, right? Not to lenders. Even if the HOA charges annually or quarterly, or you pay your dues early, lenders still take the total annual dues owed and break them down on a per-monthly basis for mortgage qualification purposes.

Another consideration, Tucci adds, is that buyers need to be aware of the type of loan they’re using when considering purchasing an HOA property.

“If your loan is a VA or FHA and you’re buying in an HOA, the complex itself has to be VA- or FHA-approved in order for you to use that type of loan,” she says. “If it’s not, you won’t be able to get financing with that type of financing.”

What lenders look for

Lenders thoroughly check into a home’s HOA and run an overall risk assessment on the association. They may look at how financially stable the association is, if the community is well-constructed and has room for growth, and if it’s favored to keep its value.

“So many little details matter because if the HOA goes bad, or isn’t managed properly, or doesn’t have money, nobody wants to buy there,” says Hernandez.

Hernandez further explains lenders mainly look at the financial obligation pro-rated monthly for single-family homes and townhomes, but with condominiums the process is much more involved.

“The loans on condominiums are priced differently and it doesn’t really have anything to do with the HOA,” says Hernandez. “The loan is different because they’re perceived as riskier. Some of the reason is because of the HOA being so involved in the viability of the property. So, when you have a condominium, the HOA very much controls the neighborhood — how it looks, is there deferred maintenance, is it a good HOA board that’s making sound decisions?”

Additionally, with condominiums, lenders also require management companies to complete special questionnaires. Hernandez shares a few examples of the key topics these questionnaires address:

• Ratio of owner occupant versus investment properties (investment properties are viewed as riskier)
• Lenders view HOAs where 15% or greater of owners are delinquent on their homeowners’ dues as increased financial risks. The higher the percentage of delinquencies, the lower the HOA’s reserve funds may be, which places a greater financial strain on residents to maintain the community
• Amount of commercial space in the area
• Association’s total reserve funds
• Ongoing litigation or big expenditures coming up in the community
• If the HOA has certain insurance types, like Fidelity Bond Insurance, which protects the HOA’s board of directors against lawsuits from residents

If a lender denies your application

What happens if a lender has a problem with the association and denies your request? Does this mean you have to kiss your dream-house-to-be goodbye? Not necessarily. You can always try another bank or chat with the HOA board for referrals to banks they’ve worked with in the past.

Tucci believes if a buyer really wants a property and it appears in good standing – meaning, it’s not dilapidated or run down – it’s worth it to really go after the property by exploring other funding options.

“HOAs are always changing,” says Tucci. “There are different [association] presidents, and rules and regulations that have to be adapted and adjusted.”

HOA and escrow accounts

When you buy a house, your lender will likely set up an escrow account. In this account your lender collects a portion of your monthly loan payment to build up a cash reserve to cover property taxes and insurance.

Buyers often wonder if they can use escrow accounts as additional funds toward HOA dues, but there are a few problems with this. Hernandez explains that most lenders won’t include HOA fees in escrow accounts because of the way dues are billed and paid. Many associations bill annually or quarterly, so the billing schedule differs from your monthly mortgage payment. Also, the two payments can’t be lumped together since HOA dues are paid directly to the association, while mortgage payments go to your lender.

There are certain lenders that make exceptions with escrow accounts however, so it could be worthwhile to ask your lender if this is something they offer.

HOA and taxes

There’s good news and bad news when it comes to HOA expenses and how they play into your taxes. If you’re renting a residence or using it as an investment property, your HOA dues may count as a rental expense and may be tax deductible. However, any special assessment fees for repairs, renovations, or maintenance likely won’t qualify.

If the property’s your primary residence, unfortunately, there are no tax breaks available.

Avoid these penalties

As with any unpaid bill, a missed HOA payment can lead to serious consequences. Think late fees — with interest! Multiple missed payments can lead to a suspension of your HOA privileges, a lien put on your home, involvement with a collection agency and even foreclosure of the property.

Along with missed payments, HOAs also take violations of their community rules and regulations very seriously. At first you may get hit with a few notices warning you of the violation, but if the violation isn’t corrected the HOA can enforce daily fines (usually of a couple hundred bucks per day), suspension of community privileges, and, in extreme cases, legal action.

To avoid potential pitfalls, it’s best to do a deep dive into the details of each HOA agreement so you’re clear about all of the rules, regulations, and financial expectations.

A deeper look at the budget

“Definitely get a copy of the budget,” Hernandez advises. “If you don’t understand how to read it, get your Realtor® or someone to explain it to you and make sure there’s reserves on file.”

Learn about expected costs and any extra expenses that could arise down the road, like special assessment fees, which are additional charges imposed on residents for large communal expenses. Say, an upcoming repair, a renovation to a community pool, or as Hernandez describes — an unexpected deep freeze that causes a whole bunch of pipes from the nearby lake to burst.

Hernandez explains it’s usually the things you’d never even think about, and when those situations arise and an HOA is strapped for cash, they’ll likely borrow money for the repairs and then give special assessments to homeowners to help cover the cost.

Bottom line — the less the HOA has in their reserve fund, the greater chance residents stand in paying more in special assessments.

Know your HOA’s expectations beforehand

Before signing any dotted lines, look closely into the following to thoroughly understand each HOAs expectations and avoid any unwelcome surprises.

Know the rules

Read every rule and regulation enforced by the HOA so you know what to expect as a resident. Maybe you want to park your RV or boat in your driveway? Maybe you hope to make design changes to your home? Your HOA could have rules in place against this, and more.

What’s the deal with special assessments?

How frequently has your HOA requested special assessments in the past? Ask to see historical records for the HOA to check how often unforeseen communal expenses have fallen on residents. Anything more than “rarely” could be a red flag that something’s not quite right.

Where’s your money really going?

What are your dues going toward? Are they paying for amenities you want to use, let alone pay for? What’s insured on your property? How much extra (besides HOA fees) are you still going to need to pay out of pocket? Don’t forget to add these costs into your budget!

Check the HOA’s financial standing

Review the HOA budget and its current reserve fund. Check into recent reports – how financially stable is the HOA? Are there any costly expenses coming up? Does the HOA have a big project planned in its future? How much of this project’s financial burden is going to fall on you as a resident?

What if there’s a problem?

How does your HOA handle conflict? Is the problem-solving process easy and streamlined? Or do residents’ concerns get brushed under the rug? Ask around to size up general feelings between homeowners and the governing HOA. Better yet, try to attend a meeting to learn about recent issues and see how the association’s managing them.

By understanding an HOA’s expectations, asking the right questions, and doing a little document disclosure due diligence ahead of time, you’ll be well on your way to setting yourself up for success and navigating the HOA purchasing process with ease.

Header Image Source: (Avi Waxman / Unsplash)