The United States is home to more than 350,000 homeowner associations (HOA). This represents more than half of all owner-occupied homes in the country, according to HOA-USA. This means that the chances are good that the home you will fall in love with will be in a managed community (governed by an HOA).
While not all HOAs are the evil, dictatorial entities we hear about in the media, their involvement in a home purchase adds another layer of difficulty to the process – an increase in the chances that something may go wrong and the deal will fall apart.
Remember, the HOA is just one entity with its fingers in your home-buying pie. Your lender is always there, in the background, scrutinizing every last slip of paper that floats its way. And, when it comes to homes in managed communities, lenders require lots of scraps of paper.
There are three common ways a HOA can mess up your real estate purchase and they all have to do with loan denial. They are all out of your control as well, but we believe that knowledge is your most effective weapon, and that if you know what to look for, you can avoid dealing with certain HOAs.
What is an HOA?
A homeowner association is a governing body of a community. Not all communities have a HOA, but homeowners in those that do are obligated to abide by the rules and regulations set forth by the HOA.
“Many HOAs are corporations; that is, legal entities that can enforce contracts with their homeowners,” according to Ilona Bray at lawyers.com.
Membership in the HOA is compulsory and automatic when you purchase a home in a managed community.
The association is governed by a board, populated with volunteers from among the community’s homeowners or elected by homeowners.
The HOA board members make decisions on how to enforce the rules (known as “covenants, conditions and restrictions,” or CCRs) and the penalties for violations. They also manage the organization’s budget, ensure fees or dues are paid, maintain the common areas and decide when special assessments are required and in what amounts.
They dropped a lien on it
If the owner of that home you have your eye on is in arrears on his HOA dues, the HOA may have no choice but to slap a lien on him. Yes, they do have that power. In fact, liens are often attached automatically to the property when a homeowner becomes delinquent on payments of dues or assessments.
The cost to remedy the lien can sometimes be exorbitant, with late charges, collection costs, interest and fines added to the amount originally owed. If the debt remains unpaid, the HOA can begin foreclosure proceedings and seize the property.
But those are the homeowner’s problems. Yours is that you want this home but there’s a lien against it. You’ll be unable to get title insurance until the lien is lifted and without title insurance your loan will be denied.
The only way to save this deal is for the seller to pay what he owes and request that the HOA release the lien.
If the HOA is involved in litigation, either against it or if the board is suing someone, it may be almost impossible to get a loan to buy a home in the community.
Common HOA litigation cases include:
- Failure to perform maintenance – If the HOA fails to repair roof problems and the roof leaks, damaging the home’s contents, the homeowner may initiate a lawsuit against the HOA. An injury on the property that occurred because of shoddy maintenance practices may also spur litigation against the HOA
- Violations of the rules – Yes, the HOA can violate its own rules and homeowners can, and will, sue.
- Building defects – An example of this is the HOA suing a roofing contractor for substandard work.
Homes in communities involved in pending or ongoing litigation are known in the finance industry as “non-warrantable,” and most lenders will deny a mortgage application for them. Yes, there are some who will, but they typically charge far more than you’ll pay for a conventional, 30-year mortgage.
You’ll find information about litigation in the HOA documents that will be supplied to you by the homeowner. If it’s a condo you’re after, and you’ll be using an FHA-backed mortgage, check HUD’s database to ensure that the community is FHA-approved. You’ll find that database online at hud.gov.
The importance of the HOAs finances
Earlier, we reminded you that an HOA introduces one more finger in the homebuying pie and, when it comes to finances, it isn’t just yours that the lender will scrutinize. It will also take a hard look at how the HOA deals with its money.
If you’ll be using an FHA-backed mortgage, determining whether or not a community’s HOA is fiscally responsible is easy; visit the aforementioned FHA database online to determine if the community is approved.
With conventional loans, Fannie Mae and Freddie Mac guidelines prevail. They have a list of conditions a community must meet before a loan will be approved. Those involving the HOA’s financial health include:
- 10 percent of HOA dues must be set aside in the reserves fund.
- No more than 15 percent of homeowners are delinquent in their dues or fees.
- The property’s insurance must meet Fannie Mae and Freddie Mac guidelines.
Any financial problems, regardless of how small, may slow down the loan process, but they may result in a denial of your application.
As soon as you know for certain that you’ve found a home you want to buy and it’s located in a governed community, begin your research. Use the online FHA database for condos. Ask your listing agent to make inquiries to determine if there is ongoing litigation.
When you receive the HOA document package, run them by your attorney. These are legal documents, full of important information but littered with complex terminology. You are expected to understand them all and sign off that you accept the terms outlined within them. It’s worth the money you’ll spend for an attorney to help you understand the contents of these documents.
Once you sign off on them, you are obligated to adhere to the terms.