If you’re in the market for a new home, there’s a good chance you’ve already viewed a few places that belong to HOA communities. Simply put, a community with shaky finances could be enough to stop a lender from approving your mortgage.
COAs & HOAs are common, especially in new neighborhoods. It’s estimated that up to 80% of new builds will be part of an Association. Though they’re not for everyone, many people choose to live in governed associations because of the higher home values, amenities, and structure.
How is buying a home in an Association different than buying a home that doesn’t belong to one?
There are some significant differences buyers should be aware of. People who want to move into an Association will have to consider the fees or dues, payments that all owners are required to make to help maintain the community. They should also know that on occasion, owners may be required to pay a large sum of money if a special assessment is needed. This would occur if, for example, the floor of the community pool cracked in early summer, and a major repair is needed to be completed right away. Though the association’s reserve fund is intended to cover these types of repairs, sometimes there isn’t enough money available.
Homeowner fees are paid directly to the Association, not the mortgage lender, so they aren’t included in your mortgage. Yet, These Association fees are considered part of your housing costs. Therefore, they can impact how much you can borrow to buy a home. A lender incorporates HOA fees into their debt-to-income calculation. They generally look for a ratio of 45% or lower (this includes your mortgage payment), so an extra few hundred dollars in Association fees can impact where you buy.
As a side note, when your lender sets up your escrow account, Association fees aren’t usually included. Most lenders don’t include these fees because of the way dues are paid. It’s not uncommon for Associations to bill monthly, quarterly or annually, and those billing schedules will likely differ from your monthly mortgage payment. Furthermore, the two payments can’t be lumped together since dues owed go to the Association, not your lender. That being said, some lenders may agree to include these fees in your escrow if you request it, so it doesn’t hurt to ask.
What’s the impact of poor HOA finances on potential buyers?
Most Associations operate well and have their finances under control. But, if a prospective buyer puts in an offer on a home in a financially unstable Association, there’s a good chance they won’t get the mortgage for the house.
As mentioned earlier, Association fees, in addition to things like Association insurance and taxes, will factor into a buyer’s eligibility. Unusually low fees aren’t great for the interested buyer or the Association though. Because overall upkeep is largely dependent on that money from owners, super-low fees could mean the Association doesn’t have enough money to complete necessary maintenance or maintain a healthy budget.
If you’re a buyer who wants to do some research about an Association before you make an offer on a home, there are ways to gather preliminary information:
- See if there have been any recent sales within the association. This will give you a better idea as to whether the community is eligible for conventional financing. If other buyers have closed on a mortgage in the last few months, that’s a good sign.
- Request a copy of the Associations balance sheet, income statement, and budget. There will be a lot of numbers here, but pay close attention to the net income and capital reserves. While making the request for the budget, ask about past or pending special assessments, too. If there is a long history of special assessments, you might want to look for a home elsewhere.
- Get an idea of how a community is managed by taking an in-person tour. Examine the condition of the shared amenities like the fitness center or the pool. A well-kept facility is another indication of the community’s concern with preventative maintenance. Plus, the condition of these amenities will impact your property value when it comes time for you to sell your home.
- Look carefully at the lobby, hallways, or clubhouse. Do the furniture, flooring, and walls appear fresh and clean? Community’s that pay attention to these things are usually up to date with maintenance responsibilities and can manage their money effectively.
What’s the impact of poor Association finances on sellers?
For residents, the impact of a poorly-managed Association is felt immediately. Not only can a deteriorating HOA hurt property values, but there is a greater chance that owners will be asked to pay more of their own money through special assessments or increased dues. The community becomes a less enjoyable place to live, too. You might have a big pothole in front of your home, or the shared park might be muddy and unusable. This isn’t fair to owners who pay their regular dues.
Unfortunately, owners may also have a harder time selling their homes if they’re ready to leave the poorly managed community. Outdated common areas and overgrown lawns can pull down the overall marketability of the property within the Association. Remember how a lender would be reluctant to give a buyer a mortgage for a home in a financially unstable HOA? Even if there are interested buyers, the seller may struggle to find someone to purchase their home.
The good news is that poorly managed HOAs don’t have to stay that way forever. A partnership with Ardent Residential means a hedge of protection for your Association, with Ardent’s Value Guard™ protection plan. Value Guard™ is the only product of its kind, and guarantees against falling property values… CLICK HERE to find out more!
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