The United States is home to more than 350,000 Homeowner and Condo associations. They represent more than half of all owner-occupied homes in the country, according to HOA-USA. This means that the chances are good that the home you will fall in love with will be in an Assocation managed community.

While most Associations strive to serve the home owner and are not the evil, dictatorial entities we hear about in the media, their involvement in a home purchase adds another layer of difficulty to the process and an increase in the chances that something may go wrong.

Remember, the Association is just one of the entities involved the home-buying process. The lender is always there, in the background, scrutinizing every financial document that may affect the transaction.  When it comes to homes in managed communities, lenders require lots of documentation to ensure the transaction is sound.

There are four common ways Associations can affect a real estate transaction. 

What is an HOA or Condo Association?

The Homeowner or Condo Association is a governing body of a community. Not all communities have an Association, but homeowners in those that do are obligated to abide by the rules and regulations set forth by in the  bylaws and rules established.

“Many HOAs are corporations; that is, legal entities that can enforce contracts with their homeowners,” according to Ilona Bray at lawyers.com.

Membership in the Association is compulsory and automatic when you purchase a home in a managed community.

The Association is governed by a board, populated with volunteers from among the community’s homeowners or elected by homeowners.

The board members make decisions on how to enforce the rules (known as “covenants, conditions and restrictions,” or CCRs) and the penalties for violations. They also manage the organization’s budget, ensure fees or dues are paid, maintain the common areas and decide when special assessments are required and in what amounts.

1.  They put a lien on it

If a homeowner is in arrears on dues, the Association probably has the authority to place a lien on the home. Yes, they do have that power. In fact, liens are often attached automatically to the property when a homeowner becomes delinquent on payments of dues or assessments.

The cost to remedy the lien can sometimes be very high, with late charges, collection costs, interest and fines added to the amount originally owed. If the debt remains unpaid, the Association can begin foreclosure proceedings and seize the property, even if other liens are attached to the home.

If there is a lien on the home, title insurance can not be issued until the lien is lifted .  Without title insurance the lender will deny the loan.  The only way to resolve this is for the seller to pay the balance owed and request that the Association release the lien  before closing.

2.  Pending litigation

If an Association is involved in litigation, either against it or if the board is suing someone, it may be almost impossible to get a loan to buy a home in the community.

Common litigation cases include:

  • Failure to perform maintenance – If the Association fails to repair roof problems and the roof leaks, damaging the home’s contents, the homeowner may initiate a lawsuit. An injury on the property that occurred because of shoddy maintenance practices may also spur litigation
  • Violations of the rules – Yes, the Association can violate its own rules and homeowners can, and will, sue.
  • Building defects – An example of this is an Association suing a roofing contractor for substandard work.

Homes in communities involved in pending or ongoing litigation are known in the finance industry as “non-warrantable,” and most lenders will deny a mortgage application for them. There are some Lendrs who will, but they typically charge far more in points and interest than a conforming, conventional, 30-year mortgage.

 When financing a home in a Condo Association, lenders will ask for a litigation disclosure.  Additionally, if using an FHA-backed mortgage, check HUD’s database to ensure that the community is FHA-approved. You’ll find that database online at hud.gov.

3.  Association Finances

In financing homes within a managed community, lenders take a long hard look at how the Association manages its money and reserves.  This is typically done through a Condo Questionnaire the lender requires the Association to complete.

If the loan is an FHA-backed mortgage, determining whether or not a community’s Association is fiscally responsible is easy.   By visiting the database of HUD approved Association online to determine if the community is approved.  Only approved communities can get FHA or VA financing.

If a Conventional loan is sought, Fannie Mae and Freddie Mac guidelines must be adhered.  Loans that meet these conditions are “Conforming“. The list of conditions a community must meet before a conventional loan will be approved include:

  • 10 percent of HOA dues must be set aside in the reserves fund.
  • No more than 15 percent of homeowners are delinquent in their dues or fees.
  • The property’s insurance must meet Fannie Mae and Freddie Mac guidelines.

Any financial problems, regardless of how small, may slow down the loan process, and may result in a denial of the loan.

4.  Association Approval

Many Associations require, within their bylaws, that the transaction be approved by the Board.  This means the buyer must apply to the association for approval as a condition to close.  

Different Associations have different criteria.  These may include age requirements (in the case of HOPA designated communities, ie 55+ and 62+  communities), Credit Score  and income requirements.  Many  require criminal back ground checks and references for approval.  

If for any stated reason an individual is not approved by the Association, the transaction is cancelled and will not close.

Protect yourself 

Work with a knowledgeable Realtor and Lender, who will help you with your due diligence.   Ask them to make inquiries to determine if there is ongoing litigation, adequate reserves, and conforming insurance.  Good Realtors will also work on the Association approval process, making sure all criteria are known and no surprises exist.

Make sure to review the Association document package.  These are legal documents, full of important information but littered with complex terminology. Use an attorney  if necessary, but understanding of rules, regulations and covenants is expected.  Once  the transaction is closed it is   an obligation  to adhere to the terms.

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