If you’ve been looking at buying a condo or townhouse unit, one thing you will be considering is the building’s homeowners association. The way that a particular building’s HOA operates, as well as the fees that unit owners pay can vary greatly, and as a potential buyer it’s a good idea to investigate how they operate and what they do.
What is a Homeowners Association?
A homeowners association is an organization created to the standards of a community or a development. An HOA is usually established by a real estate developer or by a collective of neighbors to enforce rules agreed upon by the group and to maintain common areas within that community.
An HOA will have official documents that detail how the building will be run, and what types of rules & regulations the unit owners must follow. There will typically be a Board of Directors comprised of unit owners who are in charge of enforcing these rules and maintaining certain building standards. And usually there will be a management company who will be in charge of collecting HOA dues and sending out payments for bills that the building has to pay (such as insurance, utilities, building maintenance etc.).
Homeowners associations will have an annual budget which outlines the estimated expenses the building will incur for the year. Unit owners will then pay monthly dues for their portion of the expenses, in an effort to balance the budget and make sure the HOA has money left over to pay for any unexpected expenses.
Buying a condo? Learn what the seller should provide to you.
When a condo is sold in California, the seller is required to provide the buyer with copies of relevant HOA documents to review. These can include CC&R’s, the building’s annual budget, bylaws that govern the building, and notes from recent HOA meetings. There is a lot that a potential buyer can learn from these HOA documents: Does the HOA have any debt that needs to be paid off? How much money does the association have in their bank accounts, and are there any homeowners that are delinquent in paying their dues? Are there any restrictions on work you can do to your unit, or if it can be rented out? As a buyer it is important to review the HOA’s financials to make sure there is nothing that could have a negative impact on you as a future owner, and to understand the rules & regulations that affect how you and the other unit owners must maintain your unit as part of the building as a whole.
It’s also important to understand how that money is spent. Do your HOA fees cover insurance or taxes, or are those fees additional? Understanding who controls the spending and where that money goes is crucial. It’s also important to understand how that money has been spent in the past. When visiting a community or neighborhood take a look at the upkeep of common areas. This can help you understand what you may be paying down the road. Is the pool or the lobby in good shape? Homeowners governed by an HOA are responsible for the cost of upkeep of common areas and you don’t want any surprises.
What Lenders Will Want To Know Before Loan Approval
Lenders for mortgages on a condo or townhome will want to review the HOA related documentation prior to approval of the home loan. Be sure to ask for these documents as soon as you have entered into contract; depending on who is in charge of the HOA, it can take some time to gather this information. Whether the HOA dues are paid monthly or annually, your lender factors them in with the monthly cost of your mortgage, taxes, and insurance to determine your eligible loan amount. If you are already working with your mortgage banker on a pre-approval, remember to update them as quickly as possible once you know what the possible HOA dues will be.
Can You Live with Your New HOA?
In the end, it’s up to you to determine if it’s a good fit. You need to decide if the rules of an HOA align with your lifestyle or hinder it. Only you can determine if your HOA fee is money well spent or not. The important part is making an informed decision, so gather as much information as you can about your new homeowners association before you buy.
Questions on how an HOA can affect your mortgage? Reach out to one of our mortgage experts for help.