In the United States there are more than 350,000 homeowner associations (HOA). This number represents over half of all owner-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 HOA managed community.
While HOA’s are not always negative, dictatorial entities we hear about in the media, their involvement in a home purchase adds another layer of difficulty to the process – and can increase the chances something may go wrong and the deal will fall apart.
Remember, the HOA is just one entity with its hands in your home-buying process. Your lender is always there, in the background, analyzing every last slip of paper that crosses their desk. And, when it comes to homes in managed communities, lenders require a lot of pieces of paper.
There are three ways a HOA commonly messes up real estate purchases and they all have to do with loan denial. We believe knowledge is your best weapon, and if you know what to look for, you can avoid dealing with the bad HOAs.
What is an HOA?
A homeowner association is essentially a community government. Not all communities have a HOA, but homeowners in those that do are obligated to abide by certain 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 mandatory and automatic when you purchase a home in a HOA managed community.
The homeowners association is governed by a board of volunteers from the community’s homeowners or residents 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 violating them. They also manage the HOA’s budget, ensure fees or dues are paid, maintain common areas and decide when special assessments are required.
They dropped a lien on it
If the owner of that home you have your heart set on did not pay their HOA dues, the HOA may have no choice but to put a lien on the property. Yes, they can do that! Surprisingly, liens are commonly attached automatically to the property when a owner becomes delinquent on payments of dues or assessments.
The cost to remedy the lien can sometimes be astronomical, with the addition late charges, collection costs, interest and fines added to the amount originally owed. If the debt remains unpaid and continues to accrue fines, the HOA can start foreclosure proceedings and ultimately seize the property.
These are the homeowner’s problems. Your issue is that you want this home but there’s a lien against the property. You won’t be unable to get title insurance until the lien is removed and without title insurance your loan will be denied.
The only way to complete the deal is for the seller to pay what they owe and request the HOA release the lien.
If the HOA is involved in litigation, either against it or if the HOA is suing someone, it may be almost impossible to get a loan to buy a home in the community.
Common HOA litigation cases would 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 file a lawsuit against the HOA. An injury on the property that occurred because of poor maintenance practices may also bring forth 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 considered to be “non-warrantable” in the finance industry, and the majority of lenders will deny a mortgage application for these communities. Yes, you can find some who will, but they will usually 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 hand in the homebuying process and, when it comes to finances, it isn’t just yours that the lender will analyze. It will also take a hard look at how the HOA controls its money.
If you’ll be using an FHA loan, determining whether or not a community’s HOA is fiscally responsible is easy; visit the FHA database online to determine if the community is approved.
With conventional loans, Freddie Mac and Fannie Mae guidelines prevail. They have a list of conditions a community must meet before a loan will be approved. Those involving the HOA’s financial situation:
- 10 percent of HOA dues must be set aside in the reserves fund.
- No more than 15 percent of the communities homeowners are delinquent in their dues.
- The property’s insurance has to meet Fannie Mae and Freddie Mac guidelines.
Any financial problems, no matter of how small, can slow down the loan process, but they can also result in a denial of your application.
Begin your research as soon as you know for certain that you’ve found a home you want to buy and it’s located in a community governed by a HOA. Use the FHA database online for condos. Ask your real estate agent to make inquiries to determine if there is ongoing litigation.
When you receive the HOA documents, have your attorney review them. These are legal documents, full of important information but filled with complex terminology. You are expected to understand all of the documents and sign them, stating you accept the terms outlined within them. An attorney is worth the money to help you understand the contents of these documents.
Once you sign the documents, you are obligated to adhere to the terms in them.
Your Realtor Should Know!
I have a strong background as a real estate paralegal. I spent years researching and preparing real estate closing documents for a local Lake Norman attorney. I can help you understand all aspects of the home selling and buying process so you do not run into any of the above mentioned issues in local communities.