How HOAs Affect Your Mortgage
Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.
You’ve found your dream home, and it’s in a community that has a homeowners association, or HOA. No biggie; roughly one in four Americans may now live in a community with an HOA. Still, before you start packing, you need to know how an HOA might affect both your ability to qualify and pay for a mortgage.
What is an HOA?
A homeowners association is a membership group that represents homeowners within some type of planned community; most often, the community represents single-family homes, town homes, condominiums and cooperative apartments.
The nonprofit Foundation for Community Association Research estimates that 70 million people — or 24% of Americans — lived in some kind of community association in 2017, the most recent year data was collected.
HOAs usually play a large role maintaining a community, by providing services such as repairing common areas like a building lobby or roof, community streets, fencing, gardens and possibly even sidewalks if they’re not already under the jurisdiction of a city or village. Often, HOAs also bring in desired amenities, like landscaping, fitness rooms, swimming pools or clubhouses. Regardless of the service or amenity, HOAs typically help homeowners by handling bids from contractors, dealing with insurance matters and making sure the work gets done. They also set budgets for their communities.
Inside your home, you may be able to make small changes, but larger changes — like adding a room — will probably require the approval of your HOA. While some HOAs are more lax than others, an HOA might still be able to weigh in on matters like the color of your home or the type and size of pet you keep.
HOAs are run by an elected board of directors who are required to abide by certain covenants and bylaws, as spelled out in an HOA’s governing documents. Board members are typically volunteers who live within the community, and as a homeowner, you have the right to vote board members both in and out if they’re not acting in the interests of the community or following HOA rules. You also have the right to ask that the rules be amended.
How do HOAs affect your mortgage?
HOAs provides services, and money for that typically comes from a monthly payment, which differs from one HOA to another. Still, the fee is important to potential lenders who will want to know how much you’ll be paying to accurately assess your financial situation. According to the federal Consumer Financial Protection Bureau, some HOAs charge fees of a few hundred dollars a month, while others may charge $1,000 or more.
“A high HOA fee could impact your ability to qualify for a mortgage, as it would impact your payment ratios,” said Heather Carbone, a Realtor with Big River Properties in Boston.
Still, she added that lenders don’t customarily set aside HOA fees in a separate escrow account — as they do with property taxes and homeowner insurance — to ensure these obligations are paid on time.
HOA fees affect how much a mortgage company may be willing to lend you, some experts say.
“The HOA fee is an important expense that can create a lien on the property if not paid, so like taxes and insurance payments, the bank will consider this to be part of your overall debt responsibility,” said Jonathan Faccone, founder of Halo Homebuyers in New Jersey and Pennsylvania. “Therefore, this extra expense will have an impact on your overall debt-to-income ratio, which the bank uses to base their lending amount limits.”
Paying your fees
There are different ways to pay your HOA fees. Typically, they aren’t added to your mortgage, but are separately deducted from your bank account monthly or paid by check, said Riley Adams, a certified public accountant in New Orleans, La.
“To my knowledge, I have not seen HOA fees included directly in a mortgage before,” Adams said. “However, when doing underwriting on a mortgage, the lender will ask about the fees and likely consider them toward the DTI (debt-to-income) ratio, as they are a fixed cost, and amount to ongoing debt payments.”
Carbone said lenders don’t customarily set aside HOA fees in a separate escrow account — as they do with property taxes and homeowner insurance — to ensure these obligations are paid on time. But Beverly Burris, an agent with William Means Real Estate in Charleston, S.C., said it just depends on the lender, adding that an escrow account offers a secure way for lenders to pay the fees themselves rather than relying on a borrower.
Burris cautioned that homeowners who don’t pay an HOA fee could be violating the terms of their mortgage, and also face possible foreclosure by their HOA for nonpayment.
Prepare for HOA issues
- Know potential HOA dues before putting the offer on the home. Yes, HOA dues can change, and they’ll likely go up as the years go by due to inflation. But ask about the history of HOA dues and how often they tend to increase, and add the amount to your monthly expenses. To see how HOA fees might affect the affordability of your new home, use the advanced search option at LendingTree’s Home Affordability Calculator.
- Look for special assessments. In addition to monthly fees, your HOA may need to levy special assessments to pay for major improvement or repairs like repairing a roof or building-wide deck if you live in a condominium. To see which assessments might be coming up, ask to see reports from recent HOA meetings.
- Examine the budget for your HOA. If your HOA doesn’t have cash sizable cash reserves on hand, special assessments will probably be necessary to fund relatively large projects. By looking at the budget, you may also be able to determine whether monthly fees will go up soon.
- Read HOA covenants and bylaws. This is essential reading before you move into your home as there may be a deal breaker in there. Perhaps the HOA won’t allow you to grill on your balcony or keep a certain kind of pet. Or maybe it’s a community that seems to have large mandatory HOA fee increases every year. Will you be able to afford that? Your HOA’s bylaws should clearly spell out rules for your community. Also, check the laws in your state that pertains to HOAs: some states, for example, set limits on both fees and assessments.
The bottom line
If you are moving into a building or home in a planned community, you can expect to see some type of homeowners association. However, HOAs vary widely, with different services, rules and fees that may affect your ability to both qualify for — and maintain — your mortgage. It’s essential to learn everything you can about your HOA before approaching a lender.