Your Mortgage: The good and the bad of home associations

Mike Miles from Fountain Mortgage walks you through the mortgage process.

A homeowner association (HOA) is typically a nonprofit corporation within a community of housing. Most HOAs exist in planned multi-unit community projects such as condominiums and town homes or in newer developments filled with new construction. Membership is mandatory and the association is governed by a board of directors made up of elected community residents once control is passed off from the developer. Practically all incorporated HOAs are subjected to state laws in addition to unique governing restrictive covenants and bylaws. These restrictive covenants and bylaws define community standards so as to protect property values. It’s this intention that is the good with HOAs. The bad? That’s mostly in the eye of the beholder.

Unfortunately, most homebuyers never read the governing documents of an HOA representing a community. This has a couple potential negative effects. First, the buyers could unknowingly violate the covenants. An example of this would be if a homeowner installed a wood privacy fence only to get served a notice by the HOA that the wood violates the restriction of only allowing aluminum fencing. This would result in the owner being required to either legally fight the restriction or to remove the violation and re-install the approved fence, costing both time and money. A client might also end up purchasing a great home in an overly restrictive community. A community’s limiting covenants and bylaws might be absurdly excessive and not allow the owner to add basic things like a basketball goal, patio or even landscaping.

Other than these potential negatives, HOAs do help in protecting property values. Certainly homeowners lose some ability to be creative with their home but it does prevent the opposite from happening, too. Have you ever been neighbors to someone who parks a car in their front yard? Would you ever want to be? Have you ever been neighbors to someone that painted their house pink and black? Would you ever want to be? Homes associations protect against things like that. Additionally, they provide community amenities such as a pool, tennis courts, basketball courts, clubhouse, and sometimes even common ground landscaping maintenance. Homes associations typically meet throughout the year to inform residents of current issues, some of which can be voted on should the issues present opportunities for improvements.

From a lending perspective, HOAs are considered only by the annual cost of the membership, fees which range in cost depending on the size and amenities of the community. Because these fees are associated with the property, they have to be considered as part of a housing expense. These amounts are not actually part of a mortgage payment a resident pays but underwriting prorates the annual amount to be considered in the debt-to-income ratio. Only in extremely rare occasions does a HOA fee negatively influence a loan approval decision. That being said, a good lender will always research the property to obtain the due amounts to avoid any potential surprises on that end.

If you are looking to buy a property within a community governed by an HOA make sure you take the time to read association documents. Familiarize yourself with the residents serving on the board of directors and ask to see the HOAs financial documents to determine if the corporation is running with adequate reserves. Keep in mind these HOAs are nonprofit corporations and the intention of them is to protect and enhance property values.

This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.

Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268