Real estate horror stories abound on the Internet but, in reality, most transactions flow smoothly to a successful close. Sure, there are plenty of spots along the way rife with problematic opportunities and, if you’re buying or selling a home in a managed community, those opportunities abound.
At last count, there are more than 350,000 homeowner associations (HOA) in the United States. Collectively, this represents more than half of the owner-occupied households in the country, according to HOA-USA, Inc. So, the chances are good that the home you fall in love with may just be governed by a HOA.
The HOA, in a nutshell
A homeowner association is a legal entity, of which all homeowners are members. It is governed by a group of elected decision makers known as “the board.” Larger HOAs may have additional committees to make decisions on items such as landscaping.
Common duties of an HOA board include ensuring that taxes on the common areas are paid, creating and maintaining the HOA’s budget, enforcing the rules and holding homeowners who violate those rules accountable.
So, how can your HOA derail the purchase or sale of a home? By preventing you from getting a loan, and here are three common scenarios.
Heads up for sellers
Yes, the HOA is perfectly within its rights to slap liens on homeowners, and for a variety of reasons (depending on what is listed in the HOA documents). Common reasons include being delinquent in dues or fees and a failure to abide by the CC&Rs (Covenants, Conditions and restrictions).
As a homeowner in a managed community you’ll need to settle any outstanding liens placed by the HOA before the home can be sold. As a buyer, no matter how little of a risk you pose to the lender, no matter how sterling your credit, your loan will be denied if the homeowner’s liens aren’t taken care of.
A problem buyers may encounter
Pending or ongoing litigation is a common killer of real estate deals when an HOA is involved. This litigation may be against the HOA or initiated by the HOA against the developer, a homeowner or contractor. When there is litigation, it is almost impossible to get a loan.
Common lawsuits include those for negligence, construction defects, personal injury and discrimination. You’ll find information about litigation in the HOA documents that will be supplied to you by the homeowner.
We agree that one of the worst parts of buying a home is the mortgage application process. It’s not anywhere near as fun as actually viewing homes for sale; it’s intrusive, intimidating and stressful. Unless you’re able to pay cash for a home, however, it’s a necessary evil.
When buying a condominium, imagine all of these negatives on steroids. For a number of reasons (most having to do with risk), lenders don’t like lending money to purchase condos so they more heavily scrutinize not only the borrower, but the condo community as well.
Imagine your loan being denied and the reason has nothing to do with your finances or credit.
Additionally, borrowers using FHA-backed loans can only purchase a condo in communities that are FHA-approved. You can then expect the lender to determine which percentage of the community’s units are owner-occupied and, if the number is too low (fewer than 35 percent), the loan may be denied.
Whether the loan is FHA-guaranteed or not, if a lender finds more than 15 percent of homeowners delinquent on their HOA dues, your loan may be denied. In fact, according to Annamaria Andriotis of Market Watch, it is “almost impossible” for a borrower to be approved for a mortgage under this scenario.
If anything in the community’s financials is wonky, it may affect your ability to get a mortgage.
It’s more important than ever to use a highly experienced real estate agent when buying or selling a home in a managed community. Only agents who’ve worked with HOAs know the importance of getting the HOA docs for their buyers as early in the process as possible. As well, they understand how critical it is to have certain discussions with their listing clients before putting the home on the market.
Posted by Jolenta Averill on