HOA dues and their relation to mortgages can be puzzling, but these are details you don\u2019t want to skip. To help clear the clutter on this topic, we\u2019re sharing real estate expert advice, insider knowledge, and discussing potential pitfalls to avoid when securing a mortgage for a home with an HOA.<\/p>\n An\u00a0HOA<\/a> 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\u2019re buying property that\u2019s part of an HOA,<\/a> be prepared to pay a monthly, quarterly or annual fee on top of your property taxes, insurance, and yes \u2013 mortgage payment. The association charges these fees, also known as \u201cHOA dues,\u201d to cover the maintenance and upkeep of the community.<\/p>\n Though HOA rules differ, their underlying purpose is to keep the community looking desirable and cohesive \u2014 meaning, no lime green exteriors or purple doors allowed (probably). Other common\u00a0rules<\/a> can include restrictions on rental properties, holiday decor, parking, and guidelines on lawn maintenance. To learn more about an HOA\u2019s rules and regulations, you can request to see their covenants, conditions, and restrictions (CC&R<\/a>).<\/p>\n Melissa Tucci<\/a>, 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.<\/p>\n \u201cMake 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\u2019s not in litigation and that there are no lawsuits against the HOA,\u201d Tucci says.<\/p>\n The last thing you want to do is move into an HOA with a dried up reserve or one that\u2019s constantly tangled up in legal matters. But equally as important is clearly understanding the rules and regulations, since certain associations can be more particular <\/i>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.<\/p>\n Other unique rules<\/a> 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).<\/p>\n By digging into the details ahead of time, you can avoid finding out the hard way about HOA rules that just don\u2019t fly with you.<\/p>\n HOAs are common in new neighborhoods, with approximately 80% of new builds<\/a> being part of an association and an estimated 65 million Americans living in such communities. Though HOAs aren\u2019t as popular in older neighborhoods, there are\u00a0steps residents can take<\/a> to start one if they\u2019d like to.<\/p>\n 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\u2019s finances, keeping up on maintenance, collecting dues, and enforcing rules.<\/p>\n HOA dues<\/a> 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\u00a0reserve fund<\/a>, which acts as an emergency fund for use on big expenses.<\/p>\n 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<\/a>. Keep in mind dues can fluctuate<\/a> 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\u2019s past annual reports.<\/p>\n 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<\/i> your money will go towards and if what you\u2019d be funding matters to you.<\/p>\n Is your HOA fee covered in your mortgage? While HOA dues aren\u2019t technically<\/i> 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\u2019t mean lenders turn a blind eye to this extra financial expenditure.<\/p>\n Jennifer Hernandez, senior loan officer and top producer at\u00a0Legacy Mutual Mortgage<\/a> in Houston, Texas, explains how lenders consider mandatory HOA costs.<\/p>\n \u201cWe have to take those fees on a monthly basis to use as a person\u2019s payment for qualifying,\u201d she says. \u201cSo, it doesn\u2019t 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.\u201d<\/p>\n Hernandez says this amount is broken down monthly to be part of the underwriter\u2019s review for the buyer\u2019s overall debt-to-income. Since lenders generally look for a ratio of 45% or lower<\/a> (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.<\/p>\n \u201cWe\u2019ve got to catch that kind of stuff upfront because it can make or break,\u201d says Hernandez. \u201cThe buyer was on the verge of not qualifying once I put that big fee in there.\u201d<\/p>\n 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.<\/p>\n Another consideration, Tucci adds, is that buyers need to be aware of the type<\/i> of loan they\u2019re using when considering purchasing an HOA property.<\/p>\n \u201cIf your loan is a VA<\/a> or FHA<\/a> and you\u2019re buying in an HOA, the complex itself has to be VA- or FHA-approved in order for you to use that type of loan,\u201d she says. \u201cIf it\u2019s not, you won\u2019t be able to get financing with that type<\/i> of financing.\u201d<\/p>\n Lenders thoroughly check into a home\u2019s 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\u2019s favored to keep its value.<\/p>\n \u201cSo many little details matter because if the HOA goes bad, or isn\u2019t managed properly, or doesn\u2019t have money, nobody wants to buy there,\u201d says Hernandez.<\/p>\n 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.<\/p>\n \u201cThe loans on condominiums are priced differently and it doesn\u2019t really have anything to do with the HOA,\u201d says Hernandez. \u201cThe loan is different because they\u2019re perceived as riskier<\/i>. 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 \u2014 how it looks, is there deferred maintenance, is it a good HOA board that\u2019s making sound decisions?\u201d<\/p>\n Additionally, with condominiums, lenders also require management companies to complete special questionnaires. Hernandez shares a few examples of the key topics these questionnaires address:<\/p>\n 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\u2019ve worked with in the past.<\/p>\n Tucci believes if a buyer really wants a property and it appears in good standing \u2013 meaning, it\u2019s not dilapidated or run down \u2013 it\u2019s worth it to really go after the property by exploring other funding options.<\/p>\n \u201cHOAs are always changing,\u201d says Tucci. \u201cThere are different [association] presidents, and rules and regulations that have to be adapted and adjusted.\u201d<\/p>\n When you buy a house, your lender will likely set up an\u00a0escrow account<\/a>. 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.<\/p>\n 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\u00a0won\u2019t include HOA fees in escrow accounts<\/a> 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\u2019t be lumped together<\/a> since HOA dues are paid directly to the association, while mortgage payments go to your lender.<\/p>\n 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.<\/p>\n There\u2019s good news and bad news when it comes to HOA expenses and how they play into your taxes. If you\u2019re renting a residence or using it as an investment property, your HOA dues may count as a rental expense<\/a> and may be tax deductible. However, any special assessment fees for repairs, renovations, or maintenance likely won\u2019t qualify.<\/p>\n If the property’s your primary residence<\/a>, unfortunately, there are no tax breaks available.<\/p>\n As with any unpaid bill, a missed HOA payment can\u00a0lead to serious consequences<\/a>. Think late fees \u2014 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.<\/p>\n Along with missed payments, HOAs also take\u00a0violations of their community rules and regulations<\/a> very seriously. At first you may get hit with a few notices warning you of the violation, but if the violation isn\u2019t 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.<\/p>\n To avoid potential pitfalls, it\u2019s best to do a deep dive into the details of each HOA agreement so you\u2019re clear about all of the rules, regulations, and financial expectations.<\/p>\n \u201cDefinitely get a copy of the budget,\u201d Hernandez advises. \u201cIf you don\u2019t understand how to read it, get your Realtor\u00ae or someone to explain it to you and make sure there\u2019s reserves on file.\u201d<\/p>\n![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/Is-HOA-covered-in-mortgage-666x381.png\")
<\/a>What is an HOA?<\/h2>\n
HOAs today<\/h2>\n
What do HOA dues pay for?<\/h2>\n
HOA fees and your mortgage<\/h2>\n
![\"A](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/Is-HOA-covered-in-mortgage-3-666x381.png\")
<\/a>What lenders look for<\/h2>\n
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If a lender denies your application<\/h3>\n
HOA and escrow accounts<\/h2>\n
HOA and taxes<\/h2>\n
Avoid these penalties<\/h2>\n
![\"Two](\"https:\/\/www.homelight.com\/blog\/wp-content\/uploads\/2021\/07\/Is-HOA-covered-in-mortgage-1-666x381.png\")
<\/a>A deeper look at the budget<\/h2>\n