HOA Dues (And Don’ts): How This Extra Costs Can Price You Out Of Homeownership

December 1, 2016 - 6 min read

HOA Dues Can Jeopardize Your Mortgage Approval

If you’re finally ready to buy that first home or a vacation paradise, you probably think you’ve already paid your dues, and deserve the mortgage for that property.

But it’s dues of another kind that may throw the wrench in your home application. The HOA dues required by your condo or planned community.

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HOA Benefits

Multifamily communities and planned unit developments (PUDs) offer an enticing value — the opportunity to enjoy a low-maintenance lifestyle in a condo, townhome, or single-family home.

Regular tasks like lawn care and snow removal are taken care of by the HOA within that community, in exchange for monthly or quarterly fees.

This makes budgeting easier for repairs and maintenance, can save you on homeowners insurance, and ensures that the building is cared for in your absence.

HOA Dues: What They Do

In a condominium complex, owners pay dues for repairs and insurance for common areas and shared walls, roofs, and amenities like gated security and tennis courts.

Homeowner dues may also cover liability and homeowners insurance for their individual units, depending on the HOA policy.

With a PUD, owners cover their own repairs and insurance out-of-pocket, but pay dues to maintain common areas like private roads, landscaping and liability insurance for the HOA.

Mortgage Qualifying With HOA Dues

Understand that when you finance a home, the HOA dues are counted in your debt-to-income ratios. With a single family home outside of these communities, you’ll still have maintenance costs, but underwriters won’t be considering them when they underwrite your loan.

“If a lender is qualifying you up to the maximum of what your debt-to-income ratio can accept, larger HOA fees than were considered from the beginning could affect your mortgage approval,” says Travis Schmidt, senior loan officer with Scottsdale, Ariz.-based Movement Mortgage.

In other words, you may need more income to qualify.

Dana Graham, agent with Berkshire Hathaway Home Services in Rolling Hills Estates, Calif., says sudden HOA fee spikes can and do happen.

“I had an instance a few years ago where the HOA fees were raised in the middle of the escrow,” says Graham. “We survived it, but the buyer had to re-qualify.”

In addition, when you finance a condo, you will likely be required to pay several months of HOA dues upfront when you close on your home loan, as well as any transfer fee assessed by the HOA. This can create a challenge when it’s time to close.

HOAs And Mortgage Approval: It’s Not All About You

Securing a mortgage for a residence bound by an HOA or condo association can be a bit more challenging. That’s because the lender has to consider several important factors beyond your creditworthiness.

If the HOA fails to manage the property well, the lender’s collateral (your unit) could lose value. That makes financing these properties riskier for mortgage companies.

Most of the criteria considered by lenders involve the financial health of the HOA, the quality of construction, the ratio of owner-occupants to investors, the progress of the build, and the potential for lawsuits.

HOA Questionnaires

When seeking a loan for a property within an HOA, both you and the HOA must meet lender guidelines.

“These can include the required monthly association dues or fees and the strength of the association’s financial statements,” says Michael Goldrick, Senior Vice President and Chief Lending Officer for PCSB Bank in Yorktown Heights, N.Y.

“Most lenders also require that a questionnaire be completed by the HOA...,a lender might have an issue with any negative concern that may arise on this questionnaire.”

Typical items on a condo questionnaire, according to Fannie Mae, include:

  • percentage of units sold or under contract
  • percentage owner occupied or rented
  • percentage of units with unpaid monthly dues (15 percent max)
  • adequacy of insurance coverage
  • completion of construction
  • control of the association — homeowners or developer?
  • zoning regulations
  • pending litigation (none allowed against the HOA)
  • percent of units owned by single investor (no more than 10 including the developer)
  • percent of commercial space (no more than 25 percent)
  • deed restrictions
  • environmental concerns,and/or prohibited uses

Additionally, other special circumstances may jeopardize your ability to obtain a mortgage at a multifamily development or PUD.

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Why Are Lenders So Picky?

“Special assessments – in addition to monthly dues and fees – can be implemented to meet annual budget shortfalls, reserve funds, or particular capital improvement projects like a new roof or exterior painting.

And budget shortfalls may arise if the association is having difficulties with past-due unit owners,” Goldrick says.

“Also, for new complexes, buyers should be aware of how many units – as a percentage of total units – need to be sold to qualify for standard mortgages, and the impact that any unsold units may have on monthly association dues or fees.”

Warrantable And Non-Warrantable Condos

Securing a mortgage can be particularly tricky when the residence is located in a condo development. For example, to qualify for FHA financing, the condo complex must be on a list approved by the FHA.

“If you are utilizing conventional financing, we must determine whether or not the property is deemed warrantable or non-warrantable by using Fannie Mae and Freddie Mac guidelines,” Schmidt says. “To determine this, we obtain a condo certification or a condo questionnaire from the association that asks a series of questions.”

If the condo is deemed warrantable, the financing can commence. If it is deemed non-warrantable, “your options are more limited – you would either have to pay cash or find non-traditional lending sources to complete the process,” adds Schmidt.

Fortunately, getting a mortgage for a townhome or detached single-family home within a PUD is typically easier. That’s because the borrowers own their own walls and lot, and these properties are regarded as “fee simple ownership” and “zero lot line” homes for which normal finance underwriting guidelines apply.

Checking With Fannie, VA And FHA

Before you apply for a mortgage on a property with HOA or condo dues, it pays to work closely with your agent and do your homework.

The easy way is to simply look online and see if your prospective condo is already approved by the FHA, VA or Fannie Mae. Here are links to their search pages:

  1. Fannie Mae
  2. VA
  3. FHA

Note that Fannie Mae claims it will be making changes in December 2016 to increase the number of approved condos and make them easier to find. Don’t be put off if your HOA isn’t listed, though. Many are not, but could still meet financing guidelines.

Stalking An Home Owner’s Association

Potential buyers should request copies of the association’s most recent financial statements and a copy of the offering plan prospectus and amendments, if applicable,” suggests Goldrick. “Obtaining minutes from recent association board meetings can also be helpful.”

In addition, “I recommend that you attend one or more HOA meetings during the escrow period just to see what’s going on,” says Graham. “Is there someone causing trouble, or is there a new issue of concern being discussed?”

Mary Blanchard, Vice President and mortgage banker with Atlanta-headquartered PrivatePlus Mortgage, also recommends requesting the property association’s master policy, facts about the property’s repairs and age, and a completed questionnaire (the same one your lender will later request).

“The questionnaire will show tenants versus actual homeowners,” says Blanchard. “If the development has too many renters, it could be a bad sign and might encumber your lending opportunities.”

Try Again, If Turned Down

If you are declined by a lender because of a disqualification or problem with the association, don’t panic.

“Contact a member of the condo or homeowners association board and ask if any unit owners can recommend their bank. But if no recommendations are available, or if two lenders decline to finance you, I would not pursue that residence further,” says Goldrick.

Graham recommends trying a different lender if the first falls through.

“Not all lenders have the same criteria – including portfolio lenders, who do not sell your loan to Fannie Mae, Freddie Mac, or another source; they retain the paper and look at the viability of each prospective loan as a business proposition, without the necessity of obtaining third-party approval,” says Graham.

“There are also lenders available who represent private investors not bound by Fannie/Freddie guidelines. Your Realtor should be able to recommend viable options.”

If you are ultimately approved, remember to weigh the risk of future association dues increases in your decision before purchasing.

“HOA fees are not set in stone. They can change, and you need to be prepared for that and allow a cushion within what you can afford,” Blanchard says.

If you are ultimately denied financing for that association-bound property you’ve been eyeing, be prepared to move on.

“Find a different home and start somewhere with a clean slate rather than forcing an issue,” adds Blanchard. “There are reasons lenders don’t approve, so don’t get emotionally attached when someone with a vested interest – your lender – sees red flags.”

What Are Today’s Mortgage Rates?

Today’s mortgage rates depend on whether your condo or PUD qualifies under Fannie Mae, FHA, VA or portfolio financing. An experienced lender who works with all those programs can help you sort those rules and rates out.

Time to make a move? Let us find the right mortgage for you

Erik J. Martin
Authored By: Erik J. Martin
The Mortgage Reports contributor
Erik J. Martin has written on real estate, business, tech and other topics for Reader's Digest, AARP The Magazine, and The Chicago Tribune.