Why HOA Finances Can Complicate Your Mortgage Application
Getting a mortgage is rarely straightforward, and if you’re looking to buy property in a neighborhood that has a homeowners association (HOA), including condos and co-ops, you’ll face an added level of complexity.
Your lender will assess the finances of the HOA, and a poorly managed association, or one with precarious finances, could disable the lender. It just might make you think twice about buying in a situation where surprise valuations could jeopardize your own finances.
“The reality is that most established HOAs tend to operate within acceptable standards,” said Matt Woods, CEO and co-founder of SOLD.com. But if you make an offer on a home in a financially troubled HOA, you may not be able to get a mortgage.
How can an HOA’s finances affect homebuyers?
“HOAs and other shared community management structures actually make the mortgage approval process a bit more rigorous,” said Robert Heck, vice president of mortgages at Morty. “For buyers, one of the most important considerations is taking into account the monthly or annual costs that come with owning the association or project. Monthly fees, plus home insurance and taxes, will factor into their overall budget and eligibility.
But low fees aren’t always such a good thing. Maintaining an HOA depends on its monthly maintenance fees, so extremely low fees could be a sign of deferred maintenance or other financial issues below the surface.
“One aspect of this underwriting process will be to assess the financial condition of the HOA,” Woods said. “The lender will seek to validate that the HOA is able to operate effectively with current revenue from dues imposed on owners of the association.”
How can an HOA’s finances affect sellers and residents?
For residents, a poorly managed HOA can hurt property values and drain your bank account of deferred maintenance bills.
“If the HOA does not operate within its current expenditures, HOA responsibilities will lapse if dues are not increased,” Woods said.
This poor maintenance can also make the sale more difficult.
“Common areas or other HOA responsibilities may introduce difficulties that will reduce the overall marketability of project properties,” he added.
If lenders don’t like what they see with your HOA finances, it will be harder for buyers to get a mortgage, which can make your property much harder to sell.
How can you assess an HOA’s finances?
HOA finances are complex, and lending standards vary widely based on a number of factors. Fannie Mae and Freddie Mac have many guidelines for lenders looking to underwrite mortgages for properties in HOAs. For a non-financial expert, it can be difficult to fully understand the finances of the association, especially because you may not know exactly what the lender needs to see to secure your loan. But there are a few basic things you can look at to get a general indication of the financial health of the community.
“The materials that must be provided are quite detailed, so a preliminary way for buyers to get an idea of their position beforehand is to collect data or information on recent sales within the association or project”, Heck said. “This can indicate whether a project is likely to qualify for conventional funding. If other buyers have taken out mortgages in the recent past, that’s a good sign.
When viewing a property in an HOA, you should pay attention to the quality of maintenance of common areas and the age of the property. These can both be indicators of the overall position of the community. Prospective buyers can also request a copy of the HOA’s budget and should focus on net income and capital reserves, Woods said. Be sure to ask about past or ongoing special assessments.
Current residents and sellers can be even more active in their HOA’s finances.
“HOAs are generally owner-driven. If you don’t like the way the current governing body works, the two best things you can do are; a) attend HOA board meetings and make sure your concerns are heard,” Woods said. “Plus, you can throw your hat in the ring and run for a spot on the HOA board.”
This strategy may not work for sellers looking to get out fast, but serving on the board can give you the power to help your HOA stay financially healthy, protecting everyone’s investment.
At the end of the line
Moving into an HOA can make your mortgage application a little more complicated. Lenders will review the association’s finances and may decline your mortgage if they don’t like what they see.
There’s little buyers or sellers can do in the short term to remedy an HOA’s finances, but it’s best to go into any transaction with as much knowledge about the process as possible.
Editor’s note: The author is chairman of the board of directors of his cooperative.