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Written by
Zach Wichter
Zach Wichter is a former mortgage reporter at Bankrate. He previously worked on the Business desk at The New York Times where he won a Loeb Award for breaking news, and covered aviation for The Points Guy.
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Getting a mortgage is rarely simple, and if you’re looking to buy a property in a neighborhood that has a homeowners association (HOA), including condos and co-ops, you’ll face an extra level of complexity.
Your lender will evaluate the HOA’s finances, and a poorly run association, or one with shaky finances, could turn the lender off. It might well make you think twice about buying into a situation where surprise assessments could imperil your own finances.
“The reality is that most established HOA’s tend to operate within acceptable standards,” said Matt Woods, CEO and co-founder of SOLD.com. But if you put in an offer on a house in an HOA that’s in financial trouble, you may not be able to get a mortgage.
“HOAs and other shared community management structures do in fact make the mortgage approval process a bit more rigorous,” said Robert Heck, vice president of mortgage at Morty. “For buyers, one of the most important considerations is factoring in the monthly or yearly costs that come along with owning in the association or project. Monthly fees, in addition to homeowner’s insurance and taxes, will factor into their overall budget and eligibility.”
But low fees aren’t always such a good thing. An HOA’s upkeep is dependent on its monthly maintenance charges, so super-low fees could be a sign of deferred maintenance or other financial issues beneath the surface.
“One aspect of that underwriting process will be to evaluate the HOA’s financial standing,” Woods said. “The lender will seek to validate that the HOA is managing to operate effectively within the current revenue coming in through the dues assessed to the homeowners of the association.”
For residents, a poorly-managed HOA can hurt property values and drain your bank account with bills for deferred maintenance.
“If the HOA isn’t operating within its current expenses, the responsibilities of the HOA will fall into disrepair if dues are not increased,” Woods said.
That poor maintenance can also make it more difficult to sell.
“The common areas or other responsibilities of the HOA can introduce plight that will pull down the overall marketability of the properties within the project,” he added.
If lenders don’t like what they see with your HOA’s finances, it will be tougher for buyers to get a mortgage, which can make your property much more difficult to sell.
HOA finances are complex and the lending standards vary widely based on a number of factors. Fannie Mae and Freddie Mac have extensive guidelines for lenders looking to underwrite mortgages for properties in HOAs. For a non-financial expert it can be difficult to fully understand the association’s finances, especially because you may not know exactly what the lender needs to see to underwrite your loan. But there are some basic things you can look at for a general indication of the community’s financial health.
“The materials that need to be provided are quite detailed, so a preliminary way for buyers to get a sense of where they stand beforehand is by gathering data or information on recent sales within the association or project,” Heck said. “This can indicate if a project is likely to be eligible for conventional financing. If other buyers have closed on a mortgage in the recent past, that’s a good sign.”
As you tour a property in an HOA, you should pay attention to how well-maintained the common areas appear, and how old the property is. Those can both be indicators of the overall community’s standing. 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 any past or pending special assessments.
Current residents and sellers can be even more active in their HOA’s finances.
“HOA’s are typically governed by homeowners. If you don’t like the way the current governing body is operating, the two best things you can do are; a) attend HOA board meetings and ensure your concerns are heard,” Woods said. “Additionally, you can throw your hat in the ring and run for a spot on the HOA board.”
That strategy may not work for sellers looking to get out soon, but taking a position on the board can give you the power to help your HOA remain in good financial standing, protecting everyone’s investment.
Moving into an HOA can make your mortgage application a little more complicated. Lenders will scrutinize the association’s finances and may deny 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 you can.
Editor’s note: The writer is president of his co-op board.
