If you’re in the market for a new home, there’s a good chance you’ve already viewed a few places that belong to HOA communities.
HOAs are common, especially in new neighborhoods. It’s estimated that up to 80% of new builds will be part of an association. Though they’re not for everyone, people choose to live in governed associations because of the higher home values, amenities, and structure.
Buying a home in an HOA will, for the most part, be similar to purchasing a home that does not belong to a governed community. The purchasing process will likely be stressful, the paperwork will be endless and the cost won’t be small. Both HOA members and non-members have to do things like:
- Obtain a mortgage and, potentially, require mortgage insurance
- Calculate how much money they can contribute towards their down payment
- Factor in closing and moving costs
Why is buying a home in an HOA different than buying a home that doesn’t belong to an association?
There are some significant differences buyers should be aware of. People who want to move into an HOA will have to consider HOA fees or dues, payments that all owners are required to make to help maintain the development. They should also know that on occasion, owners may be required to pay a large sum of money if a special assessment is levied. This would occur if, for example, the floor of the community pool cracked in early summer, and a major repair needed to be completed right away. Though the association’s reserve fund is intended to cover these types of repairs, there isn’t always enough money available, especially if the reserve fund was recently depleted.
HOA fees are paid directly to the association, not the mortgage lender, so they aren’t included in your mortgage. Yet, HOA fees are considered part of your housing costs. Therefore, they can impact how much you can borrow to buy a home. A lender incorporates HOA fees into their debt-to-income calculation. They generally look for a ratio of 45% or lower (this includes your mortgage payment), so an extra few hundred dollars in HOA fees can make a difference.
As a side note, when your lender sets up your escrow account, HOA fees aren’t usually included. Most lenders don’t include HOA fees because of the way dues are paid. It’s not uncommon for associations to bill annually or quarterly, and those billing schedules will likely differ from your monthly mortgage payment. Furthermore, the two payments can’t be lumped together since HOA dues go to the association, not your lender. That being said, some lenders may agree to include HOA fees in your escrow if you request it, so it doesn’t hurt to ask.
Returning to mortgages and lenders, there’s more to HOAs and mortgages than association fees. Your lender must evaluate the HOA’s finances in addition to your own. A community with shaky finances could be enough to stop a lender from approving your mortgage.
What’s the impact of poor HOA finances on buyers?
Most HOAs operate well and have their finances under control. But, if a prospective buyer puts in an offer on a home in a financially unstable HOA, there’s a good chance they won’t get the mortgage for the house.
As mentioned earlier, association fees, in addition to things like HOA insurance and taxes, will factor into a buyer’s eligibility. Unusually low fees aren’t great for the interested buyer or the association though. Because every HOA’s upkeep is largely dependent on that money from owners, super-low fees could mean the HOA doesn’t have enough to complete necessary maintenance or maintain a healthy budget.
If you’re a buyer who wants to do some research about an HOA before you make an offer on a home, there are ways to gather preliminary information:
- See if there have been any recent sales within the association. This will give you a better idea as to whether the HOA is eligible for conventional financing. If other buyers have closed on a mortgage in the last few months, that’s a good sign.
- Request a copy of the HOA’s budget. There will be a lot of numbers here, but pay close attention to the net income and capital reserves. While making the request for the budget, ask about past or pending special assessments, too. If there is a long history of special assessments, you might want to look for a home elsewhere.
- Get an idea of how a community is managed by taking an in-person tour. Examine the condition of the shared amenities like the fitness center or the pool. A well-kept facility is another indication of the community’s concern with preventative maintenance. Plus, the condition of these amenities will impact your property value when it comes time for you to sell your home.
- Look carefully at the lobby, hallways, or clubhouse. Do the furniture, flooring, and walls appear fresh and clean? HOAs that pay attention to these things are usually up to date with maintenance responsibilities and can manage their money effectively.
What’s the impact of poor HOA finances on sellers?
For residents, the impact of a poorly-managed HOA is felt immediately. Not only can a deteriorating HOA hurt property values, but there is a greater chance that owners will be asked to pay more of their own money through special assessments or increased dues. The community becomes a less enjoyable place to live, too. You might have a big pothole in front of your home, or the shared park might be muddy and unusable. This isn’t fair to owners who pay their regular dues.
Unfortunately, owners may also have a harder time selling their homes if they’re ready to leave the poorly managed community. Outdated common areas and overgrown lawns can pull down the overall marketability of the property within the association. Remember how a lender would be reluctant to give a buyer a mortgage for a home in a financially unstable HOA? Even if there are interested buyers, the seller may struggle to find someone to purchase their home.
The good news is that poorly managed HOAs don’t have to stay that way forever. If you don’t like the way the current board is running things, you can become more vocal and attend board meetings to ensure your concerns are heard. You could even take things a step further and run for a spot on the board. This is a long-term solution, but it’s far better than doing nothing, especially if you’re hoping to move within the next few years.
Conclusion
Moving into an HOA can complicate your mortgage application. It’s not just your finances that the lender must consider, the HOA’s financial health also comes into play. If the lender is concerned about the financial state of the association, they may deny your mortgage.
Owners who want to move from a poorly managed HOA may also experience difficulties selling their place, and there isn’t a great short-term fix. But if you’re not happy with the state of your community, chances are others aren’t happy either. Work with other HOA owners, board, manager and even attorney to see what can be done so that home values don’t continue to plummet.