Are HOA Dues Making Real Estate Unaffordable?

HOA Dues Don’t Make The News — But Maybe They Should

When mortgage rates move a quarter percent in any direction, that’s big news. But lurking in the background are fees for homeowners associations. (HOA dues). Don’t overlook them.

HOA dues are an expense that can sink many loan applications and derail personal finances. This is especially true for first-time buyers and those with marginal finances.

Who Really Owns Your Home?

The world of real estate ownership can be divided into two flavors: properties which are owned “fee simple” (you own your building and land) and those under a homeowner or condo association.

With fee simple ownership, you can do what you want with the property. Just work within the limits of zoning and local laws.

If you want to paint the place orange, that’s fine. If you want a big American flag out front, or a 120-pound dog inside, that’s not only okay, it’s nobody else’s business.

HOAs Large And Small

With HOAs, the situation is not so simple. Some 68 million people live in communities governed by homeowner associations, a form of community government created by developers as they build-out their projects.

Designed to help manage anywhere from a few homes to thousands of properties, HOA dues and rules can vary immensely.

A small HOA might collect $50 a year from 25 owners to assure that their patch of common property is mowed.

Alternatively, the HOA in a large condominium community might have a full-time staff and a budget in the millions — whatever’s required to provide recreational facilities for thousands of single-family homes, condos and townhouses.

Rules, Rules, Rules

As a property owner, what an HOA does or doesn’t do can be very important, because such organizations have the authority to fine or even foreclose on rule violators.

And no, you can’t simply reject membership, because a condition of purchasing an HOA property is that you join, pay dues, and follow the rules.

All of which brings us to the matter of money. Being part of an HOA comes with costs that can derail a mortgage application — and in extreme cases, lead to foreclosure.

HOA Dues And Mortgages

When buying an HOA property, there’s always the question of expenses. A mortgage lender will look at monthly HOA fees in the same way it considers student loans or auto debt.

If a unit has a $270 monthly fee – about the national average when you divide $85 billion in HOA revenues among 26.2 million units – that’s a recurring monthly cost that lenders will consider when calculating the borrower’s debt-to-income ratio (DTI).

Debt-To-Income Ratios

Let’s imagine that a lender allows 31 percent of your income for housing-related costs, and that two buyers have a combined income of $6,000 per month.

This means up to $1,860 can be spent on the mortgage, insurance, property taxes and HOA or condo fees. If insurance costs $100 per month and taxes are $300 per month, then the borrower has $1,460 available for mortgage payments.

Based on income, you’d probably qualify for a 4.25 percent, 30-year, fixed rate mortgage for roughly $296,750.

Add $270 in HOA dues, and just $1,190 is available for mortgage payments — the loan amount falls to 241,900— $54,850 less, enough to make many properties unaffordable and off-limits.

However....

Lenders don’t add the expected ownership costs of a fee-simple house to your debts when they underwrite your application.

You’ll still have to pay for repairs, maintenance, lawn mowing, etc. Plan for these costs and find a way to pay them if you choose to avoid property with an HOA.

Reserves And Special Assessments

HOAs collect monthly fees to underwrite a variety of costs, including insurance, maintenance, repairs, operating common areas, waste pick-up, snow removal, and reserves.

The last item is especially important, because major components can wear out over time or be damaged. The HOA naturally wants funds on hand to make repairs as needed.

Unfortunately, if condominium reserve funds are insufficient (due to poor management or just bad luck), an HOA can extract a “special assessment” from you. That’s a cute term meaning you are about to get a very big bill.

How big? There’s no world record holder, but special assessments of more than $10,000 have been reported.

HOA Power Over Homeowners

What happens if you don’t pay or can’t pay? The debt becomes a lien on the property, and potentially the HOA can force you into foreclosure.

To make matters more interesting, monthly HOA fees are not set in stone. They can go up – and in some cases they can go up a lot.

“Because costs are constantly on the rise due to inflation, most HOA’s annual budgets require annual increases,” explains NOLO.com.

“As a result, most HOAs need to collect more HOA dues from the owners each year. Sometimes, circumstances demand that the HOA increase dues quite significantly (more than the amount required for general cost increases), or levy high assessments.

This might happen, for example, if the HOA does not have sufficient funds in reserve to pay for a common area repair.”

Before You Buy A Home With An HOA

Financing a condominium with a mainstream program, like a government-backed mortgage or a Fannie Mae / Freddie Mac home loan, offers you certain protections.

Mortgage lenders don’t want to finance in developments with questionable finances or dodgy boards, because their money is on the line as well as yours. So buying in a lender-approved community is one safeguard you can take.

For PUDs, there are no approved lists, but lenders may review their finances and other documents as well — checking for lawsuits against the association, for example.

Here’s a link to the short version of Fannie Mae’s questionnaire for HOAs. You might want to get this information before making an offer on an HOA-controlled property.

Stalk Your HOA

This does not address your quality of life in your home, however. Experts recommend that you “stalk” the HOA by reading the minutes from a few recent HOA or Board meetings.

The meeting minutes can “out” any regular dust-ups among neighbors. You may also discover upcoming major (expensive) projects and plans to have owners cover costs.

Thomas Schild of Thomas Schild Law Group in Rockville, an expert in community associations. told The Washington Post in a recent interview, “The minutes can give insight into how an association operates.

“The best time to request the minutes is before you submit an offer. You may not get them once you have ratified a contract.”

What Are Today’s Mortgage Rates?

Today’s mortgage rates did increase across the board today, but are still affordable. Your actual mortgage offer will in part depend on your property type. A high-rise condominium will cost more to finance than a single family fee-simple residence, all other things being equal.