The other kind of dues
You probably think that since you’ve already “paid your dues”, you now deserve a mortgage for that first home or beautiful vacation spot you’ve always wanted. Not necessarily so. There are dues of many kinds that need to be looked at, some of which might throw a wrench into the process of applying for a home. These are the homeowner association (HOA) dues that are needed by your planned community or condominium association.
Common area fees
In a homeowners’ association, the cost of repairs and insurance for common areas is usually covered by the homeowners. These costs can sometimes cover shared walls, roofs, and amenities like pools or gated security.
Depending on the association’s governing documents, homeowner dues may also cover liability for their individual units. With a planned unit development (PUD), individual liabilities like repairs and insurance are paid out-of-pocket. Otherwise, HOA fees cover the common areas including items like private roads and common services like landscaping and liability insurance.
Why an HOA can make mortgaging difficult
It can sometimes be a bit more challenging to secure a mortgage for a residence bound by an HOA. The reason behind this is that the lender has to consider many more factors beyond your creditworthiness. An HOA can be partly responsible for managing and taking care of the property and if they fail to do this, the property value, which in this case is the lender’s collateral, could go down. Thus, in the eyes of a mortgage company, financing such property is riskier. The lender will most likely need to look at the financial position of the HOA, the construction quality, owner-occupants to investor ratio, the progress of the build and any potential for lawsuits.
Debt-to-income ratio
If you have a single family home outside of an HOA community, you’ll have to take care of all the maintenance costs yourself. The good thing is, underwriters won’t consider such costs when they underwrite your loan. But within an HOA, those dues will be counted in your debt-to-income ratio when you finance a home.
HOA fees larger than those considered in the beginning will be looked at if the lender decides to qualify you up to a maximum of what your debt-to-income ratio can accept. If this happens, your mortgage approval can be affected. You may end up being disqualified unless your income increases. Also, one is likely expected to pay several months of HOA fees upfront per the community’s governing documents, plus any transfer fees assessed by the HOA in the closing costs. This has created challenges for buyers many times in the past.
Conclusion
HOA fees may make it difficult to secure a mortgage. It is most advisable that potential buyers request copies of an HOA’s most recent financial statements, the most recent reserve study and if applicable, amendments. Even recent association board meeting minutes can also be helpful.
FAQs
HOA fees larger than those considered in the beginning will be looked at if the lender decides to qualify you up to a maximum of what your debt-to-income ratio can accept. If this happens, your mortgage approval can be affected. You may end up being disqualified unless your income increases.
Does HOA affect a mortgage loan? ›
The required HOA fee could even influence your ability to qualify for a mortgage since it shifts your debt-to-income ratio. Even if the bank offers you a mortgage, a higher HOA fee could mean the mortgage is smaller than you'd need.
What is the disadvantages of HOA fees? ›
Disadvantages of HOAs
Community standards that help maintain property values. HOA fees can increase over time. Amenities like pools, common green areas, and fitness centers. Restrictions on what you can do.
How much can an HOA raise fees in Arizona? ›
They may also dictate the process HOAs must follow before raising the monthly dues. For example, Arizona's Revised Statutes Section 33-1803 states that HOAs cannot raise fees by over 20% per year without a majority vote from the membership.
How much can an HOA raise fees in California? ›
The amount of the increase cannot exceed 20% of the value of the previous year's dues. This safeguards residents against sudden and untenably large jumps in the cost of living in a homeowners association. Residents must be notified at least 30 days in advance of an increase in dues.
Is HOA part of the debt-income ratio? ›
If you have a single family home outside of an HOA community, you'll have to take care of all the maintenance costs yourself. The good thing is, underwriters won't consider such costs when they underwrite your loan. But within an HOA, those dues will be counted in your debt-to-income ratio when you finance a home.
Are HOAS responsible for debt? ›
It is important to note that a homeowners association is set up such that all homeowners are held accountable for a portion of the debts of the association. The HOA will do whatever necessary to get those funds, usually by levying special assessments, before they consider declaring bankruptcy.
What are some potential drawbacks of homeowners associations for residents? ›
What are the cons of an HOA?
- HOA rules. Although HOA rules exist to protect the community's integrity, improve the quality of life, and keep residents safe, some people may find them to be restrictive. ...
- HOA dues and fees. Regular fees and assessments are part of living in an HOA. ...
- HOA mismanagement.
HOA fees typically cover the costs of maintaining common areas, such as lobbies, patios, landscaping, swimming pools, tennis courts, a community clubhouse, and elevators. In many cases, the fees cover some common utilities, such as water/sewer fees and garbage disposal.
What are positives about HOA? ›
HOAs give members a natural sense of community through planned activities like holiday parties, clubs and athletic events. Members also feel a shared responsibility to maintain the integrity of the neighborhood grounds and buildings, which creates a safer, more aesthetically pleasing environment for all residents.
If fines are left unpaid, late fees can become costly, and eventually an HOA can file a lien against the home. This can happen even if a mortgage is owed on the home. If the situation becomes severe, the HOA can foreclose on the lien, which can be financially and socially disastrous for the homeowner.
What does HOA cover in Arizona? ›
The Rights and Responsibilities of an HOA in Arizona
A community association is normally in charge of administering and maintaining communal spaces as well as enforcing community rules. They have the authority to collect homeowner dues and assessments to pay for these services.
Can you sue an HOA in Arizona? ›
Homeowners can bring a lawsuit against their HOA, and in some circ*mstances against individual board members, if the HOA abuses its power.
Do HOA fees reduce capital gains? ›
No, the HOA fees you pay don't directly lower the capital gains tax you'll have to pay when you sell the rental property. However, you can add the HOA fees you pay over the years to the cost basis of the property.
Does California law supersede HOA rules? ›
Common Areas of Conflict
The local law supersedes the rules and regulations of the HOA, meaning that HOAs must ensure they are operating under the law.
What is the maximum late fee for HOA in California? ›
(2) A late charge not exceeding 10 percent of the delinquent assessment or ten dollars ($10), whichever is greater, unless the declaration specifies a late charge in a smaller amount, in which case any late charge imposed shall not exceed the amount specified in the declaration.
Is homeowners insurance included in a mortgage? ›
Unlike PMI, homeowners insurance is unrelated to your mortgage except for the fact that mortgage lenders require it to protect their interest in the home. While mortgage insurance protects the lender, homeowners insurance protects your home, the contents of your home and you as the homeowner.
What is included in a mortgage payment? ›
Your monthly mortgage payment typically has four parts: loan principal, loan interest, taxes, and insurance. Making one payment to cover all four parts means you only have to remember one due date.
What is piti and why is it used? ›
PITI is an acronym for principal, interest, taxes, and insurance—all of the standard components of a mortgage payment. Because PITI represents the total monthly mortgage payment, it helps both the buyer and the lender determine the affordability of an individual mortgage.
