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.