When hunting for the perfect home to buy, you undoubtedly consider the floor plan, lot size, neighborhood amenities, school district, and other factors. But don’t forget to find out if the house is part of a Homeowners Association (HOA). HOA fees can affect your debt-to-income ratio and complicate the loan approval process. Here’s what you need to know about HOA fees and how your lender accounts for them when you apply for a mortgage.
What is an HOA?
Homeowners Associations are non-profit organizations comprised of volunteer community members who manage a planned neighborhood’s finances and maintenance needs. They also collect dues from fellow residents and create and enforce rules that every homeowner must abide by.
About one in four Americans live in a community with an HOA, and roughly 80% of new single-family homes, townhouses, and condominiums are part of an association. While HOAs generally have good intentions, homeowners have mixed feelings about these organizations.
HOA rules differ from one community to the next, but they have a common goal—to keep the community looking cohesive and desirable. This often results in restrictions on exterior paint colors, roofing and fencing materials, guest parking, lawn maintenance, holiday decorations, and more. To find out your HOA’s specific rules, request to see their covenants, conditions, and restrictions (CC&R).
The idea behind an HOA is to retain a beautiful community and keep property values high, but this comes at a cost. Homeowners Associations charge fees on top of what you already pay for your mortgage to fund things like lawn care, pest control, and snow removal in communal areas. HOA fees also pay for neighborhood amenities like pools, parks, clubhouses, and fitness centers.
How Mortgage Lenders Account for HOA Fees
HOA dues can range anywhere from $100 to $1,000 or more per month. Most associations charge around $200 to $300. Future increases may occur based on rising budgets, unexpected maintenance costs, or inflation.
Homeowners Associations may collect fees monthly, quarterly, or yearly. No matter the timeframe, your mortgage underwriter will break down the fees into monthly costs to help calculate your debt-to-income ratio (DTI). This is a comparison of your monthly debt responsibilities—including property taxes, homeowners insurance, and HOA fees—and your monthly income. It’s in your best interest to have a DTI under 50%, meaning your debts are less than half of your income.
Perhaps you calculated your debt-to-income ratio when you determined that you could afford the home you want to buy—but that was before you knew about the HOA. Now, a few hundred dollars per month in extra fees could throw off your DTI, potentially impacting your ability to qualify for a mortgage. This is why it’s so important to find out about HOA fees early in the home-hunting process.
Other HOA Factors that Affect Your Home Loan
HOA fees aren’t the only things that affect your mortgage. Here’s what else you need to know:
- VA and FHA loans: Your HOA community must be VA- or FHA-approved for you to finance your purchase with either a VA home loan or FHA home loan.
- HOA risk assessment: Your lender will scrutinize the HOA when you apply for a home loan. The organization’s financial stability and management history could affect the favorability and growth potential of the community. While these factors are completely out of your control, they could affect your ability to qualify for a mortgage.
- Other funding options: If one lender denies your application, that doesn’t necessarily mean you have to give up your dream home. After all, you can always apply with another bank. Consider asking your HOA for referrals to banks they have worked with in the past.
Can HOA Fees be Included in Your Monthly Mortgage Payment?
You have different options for paying your HOA fees. However, they can’t be added to your mortgage payment because you pay dues directly to your association, not your lender.
It’s also important to note that lenders don’t usually set aside HOA fees in an escrow account. This is common practice with property taxes and homeowners insurance to make sure these payments are made on time. However, failure to pay HOA fees could create a lien on the property, violate the terms of your mortgage, or result in foreclosure. Therefore, it’s critical to pay your HOA fees on time.
Some of your options for making payments include:
- Set up automatic monthly withdrawals from your bank account
- Pay your HOA by check once a quarter
- Pay your dues upfront for the entire year
Apply for a Mortgage Today
By understanding whether the home you want to buy is part of an HOA, you’ll be better prepared to navigate the home-buying process with ease. When you’re ready, reach out to Financial Concepts Mortgage to get pre-approved for a home loan. We want to help you succeed with a loan that fits your budget and qualifications. If you’re not sure where to start, trust our outstanding lending professionals to walk you through your options.