Content of the material
- What Is A Homeowners Association?
- A Few Other Considerations
- 4. Fees and Your Mortgage Approval
- How much are HOA fees?
- 7. The HOAs Reputation
- What Are HOA Fees?
- Related Resources
- A Beginner’s Guide To Restrictive Covenants In Real Estate
- Condo Vs. Co-Op: Know The Difference
- HOA Special Assessment: What It Is And How To Handle It
- What is an HOA fee?
- HOA Fees: What Do They Include?
- Managing HOA Fees
- How to Determine HOA Fees
- Can You Avoid HOA Fees?
- Can You Deduct HOA Fees From Taxes?
- Seven Ways HOA Dues Affect Your Finances
- HOA Dues Can Change
- The Dues Don’t Cover Everything
- HOAs Can Affect Your Credit
- You Pay for Things You Might Not Use
- You Probably Won’t Save on Taxes
- You May Need to Pay Dues at Closing
- You Still Need Insurance
- The Bottom Line: Paying HOA Fees Is Just As Important As Paying Your Mortgage
What Is A Homeowners Association?
Before we get into fees, let’s discuss what a homeowners association actually is. Homeowners associations, or HOAs, are organizations that manage master-planned communities on behalf of the community’s developer. HOAs often govern communities of single family, detached homes, though you can find them in condo communities as well.
HOAs have a few intended purposes: to keep shared spaces within a community maintained and to create rules that prevent a single homeowner from making a change to their home that lowers the property values of the community as a whole.
A Few Other Considerations
Be sure NOT to count any leftover money (surpluses). When making your budget, do so like there was no money left over from the year before. While an HOA is a not-for-profit organization, taking retained earnings into account for your coming year’s budget can spell disaster in the long run. Your operating funds might come up short in the end.
Also, don’t forget to consider owner delinquencies. If your community has quite a few, you might have to add an extra income allowance so you don’t come up short on income that will cover the reserve and expenses. In this case, your assessments might have to be higher.
4. Fees and Your Mortgage Approval
When contemplating a property purchase in a planned development, you'll of course factor the impact of its HOA dues into your overall finances. So, too, will prospective mortgage lenders.
As they do with property taxes (which, by the way, are not included in HOA fees at most developments), banks will consider your monthly HOA fees when deciding how large a mortgage you’ll be able to afford. As a result, you may wrestle with vexing tradeoffs as you decide among properties. Higher HOA fees could leave you with a smaller approved amount to spend on your house compared with choosing an alternative property with low or no fees.
Interestingly, the presence of fees doesn't necessarily reduce the value of a property; if anything, there's evidence of the opposite effect. The research by microeconomist Clarke found that, after equalizing for home size and location, properties that were part of an HOA sold for an average of about 4% more than those who weren’t in an association. The premium is highest, he found, when the house and development are new; it declines with age.
Your prospective lender can provide the mortgage-payment figure, and you should already have the property-tax and HOA-fee numbers. If you’re just starting on your home search—and don’t yet have relationships with any lenders—use an online mortgage calculator to estimate the likely mortgage payment for the principal you’re seeking, and to enter other relevant information, including your planned downpayment.
Again, any lender you’re talking with can provide this. Alternatively, many online mortgage calculators, including the one we linked to above, also allow you to request quotes from mortgage lenders on rates and maximum approved amounts.
How much are HOA fees?
Nationally, the average HOA fee for a single-family home is between $200 and $300. HOA fees vary widely depending on the property location and the amenities available to property owners. The board that runs the HOA decides how much to charge property owners to cover the community’s expenses.
For example, the owner of an oceanfront condo in Florida that’s loaded with amenities might pay $1,000 a month in HOA fees, while someone in a modest gated community 10 miles inland might pay only $150 a month.
Larger residences in an HOA sometimes pay more than smaller ones, with the assumption being they use more services. For example, it costs more to cut the grass at a large, single-family home than at a one-bedroom unit.
7. The HOAs Reputation
Since the association essentially serves as a hyper-local government for the community, it pays to look into who runs it and how well those people function together.
It's very common for HOAs to be overseen by community residents who hold their positions as volunteers and are elected by association members. However, some associations are entirely managed professionally. If a private company manages the HOA, investigate its reputation before you buy. If the HOA has some employees, or companies to which it contracts out tasks, ask about these entities and the work they do.
Talk if you can to some of the building’s current owners—preferable ones who are not on the HOA board and have lived in the building for several years. How collegially does the board function? Are differences in opinion usually handled civilly and constructively? Be alert for indications of frequent, even perpetual, drama. As with some other governing bodies, HOAs can be hampered by egotism, power plays, and petty politics.
Schedule time to speak with the HOA president, to get a sense of whether you want this person making decisions on your behalf about the development. Ask the president, too, about interest among residents in serving on the board: Is there high motivation to do so, or relative indifference? This conversation may also motivate you (or not) to serve on the board yourself one day, a move that would require getting elected and giving up some free time for your new responsibilities.
What Are HOA Fees?
If you plan to buy a home in an HOA, you’ll pay fees—often monthly—directly to the association to help cover a variety of maintenance costs and neighborhood amenities.
The fees could go toward:
- Basic upkeep. An HOA is usually in charge of maintenance of common areas, such as lawns in front of and in between townhomes and other common areas throughout the subdivision, including parks and along walking paths. HOAs will hire someone to plow the driveways, parking lots and possibly the streets in the area after a snowfall.
- Building maintenance. The maintenance of the home exterior, such as siding, roof and gutters, could be covered by an HOA, especially in a townhome community where there are shared walls. Since major projects can cost a lot of money, an HOA might put aside a percentage of fees over the course of several years to pay for community-wide roof and gutter replacement, for example.
- Amenities. If the neighborhood has a pool, a clubhouse or on-premises security, you’re likely to pay for them through your HOA fees.
- Insurance. The HOA’s insurance policy will need to cover the areas that wouldn’t fall under individual homeowners’ insurance, such as common areas.
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A Beginner’s Guide To Restrictive Covenants In Real Estate Home Buying – 6-minute read Hanna Kielar – May 23, 2022 Many HOA agreements include clauses called “restrictive covenants” that you must abide. We’ll illustrate what a restrictive covenant is and how it could affect you. Read More
Condo Vs. Co-Op: Know The Difference Home Buying – 6-minute read Andrew Dehan – May 23, 2022 Condos and co-ops are commonly confused housing types. Learn all about the similarities, differences and financing options for condos and co-ops here. Read More
HOA Special Assessment: What It Is And How To Handle It Mortgage Basics – 6-minute read Sidney Richardson – May 23, 2022 Moving to a neighborhood with an HOA? You should be prepared to pay some extra, unexpected feed. Here’s what you need to know about special assessments. Read More
What is an HOA fee?
An HOA fee is a regular fee (usually monthly or quarterly) assessed by the homeowners association to pay for the services that it provides. If you live in a condo, you may pay a similar fee to the condo association.
If you plan to buy a home in an HOA, it’s important to understand how HOA fees work. The HOA uses the money it collects to help maintain or improve the quality of life in the community. These fees are paid on top of your mortgage, property tax and homeowners insurance payments. Even if your mortgage is paid off, you’ll have to continue paying HOA fees.
HOA Fees: What Do They Include?
As mentioned above, if you live in an HOA community, you’ll need to pay fees. These can vary widely depending on the area and the amenities that are included. Find out in advance what your monthly share will be to make sure that it fits into your budget. Note that the services your HOA fees cover depend on the area where you live and what amenities come with the community. Here are some examples of what might be included:
- Trash pickup
- Community gym, pool or common areas
- Maintenance and repairs
Again, any potential HOA fees should be calculated into your total monthly costs before you buy a home in an HOA community. You also should be prepared to pay your initial payment at closing; your lender will let you know how much you need to have as part of your closing costs (your seller may already have paid part of the fees and will prorate them which will be indicated on your Closing Disclosure). You’ll also find out how these fees will be calculated on an ongoing basis as part of your mortgage payment, or if you’re required to pay a lump sum at the beginning of the year.
Managing HOA Fees
HOA fees can be a dreaded expense, but it’s important to remember that these association fees cover many things that help improve the quality of life in the community you’re part of. Your homeowners association works hard to improve the community so that those who live there have a positive experience and high home values.
As with anything that provides a specific benefit, these things come at a cost. That’s where your contribution comes in, in the form of association fees. As stated above, many homeowners associations choose to hire a management company to handle the more complicated aspects of running a community.
- The Pros And Cons Of Low HOA Fees
- Are HOA Fees Tax-Deductible?
- What Happens If You Don’t Pay HOA Fees?
How to Determine HOA Fees
Bottom line: Nobody is excited about having to pay higher assessments, even board members.
So, you have to first look at the association’s budget areas: Expenses, income, and reserves. You must make sure your HOA is covered in each of these areas for the next year.
A homeowners association has a responsibility to maintain and repair all common areas within the community. Maintenance and repair services don’t come free. The board needs to get that money from somewhere. And while the HOA can have other fundraising activities, its main source of income is the HOA fee.
When planning your budget, it’s important to take everything into account. What type of vendor services do you need this coming year? Do you expect to pay more or less than before? The usual items to consider are:
- Maintenance and repairs
- Employee salaries
- Vendor services
- HOA management fees
- Reserve funds
You’ll then want to calculate the overall income needed from your homeowners so you can calculate HOA assessments. So, you’ll add up total budgeted expenses, the total contribution to the reserve, and all miscellaneous income.
Then, to determine how much each owner will pay per month, take the total in assessments you calculated and divide that number by the number of homes in your association. Then divide that number by how many assessments there will be (such as 12 for each month of the year).
Some associations use an HOA fees calculator based on the size of the property. For instance, a resident with a larger property may pay more than a resident with a significantly smaller property. Others divide the assessments equally. Make sure to check your bylaws to know how you should divide HOA dues.
Can You Avoid HOA Fees?
If you are buying a home in a neighborhood where being part of the HOA is required upon purchase of the home, then you’ll need to pay fees. You could avoid fees if your HOA is voluntary. For example, you might have neighborhood amenities such as a pool and fitness center that are optional for homeowners.
If you have trouble paying your HOA fees—because of a job loss or another major financial hardship—you can try to negotiate with the association. But the association likely has enforcement mechanisms if you don’t pay, from late fees to putting a lien on your house that would force payment before you could sell.
Can You Deduct HOA Fees From Taxes?
If you purchase your primary residence in an HOA, the fees are not exempt from taxes. But the fees might be if you are renting out the property. The amount of money that’s tax deductible would depend on whether the rental was for a partial year or full year.
Seven Ways HOA Dues Affect Your Finances
Before you commit to a home with an HOA, there are a few things you should know about HOA fees.
HOA Dues Can Change
HOA dues can go up or down. If that happens, you may have a hard time paying your home loan. HOA fees will rise when projects need funding, and they also may increase due to automatic inflation adjustments.
Ask about the HOA’s history of raising fees, and find out about any planned projects or other changes in the works.
As you prepare to buy a home with an HOA, you and your lender should evaluate the home's HOA dues to determine whether you can afford both the loan and the dues.
The Dues Don’t Cover Everything
Your HOA covers routine and planned costs. Often large projects and emergency repairs need immediate funding. In those cases, you may need to pay an additional special assessment. These assessments can cost several hundred dollars to several thousand dollars or more.
HOAs Can Affect Your Credit
When you buy into an HOA, you agree to pay HOA dues. If you don’t pay, you will owe the HOA money, and the HOA can send your past-due account to collections. The HOA can also put a lien on your property. Skipping HOA fees can even lead to foreclosure in some cases.
Collection accounts and public records may appear on your credit reports, making it harder for you to get other loans or find housing in the future.
You Pay for Things You Might Not Use
HOA dues cover costs for common areas around your property, but you might not enjoy or even want all that you’re paying for. That’s a tradeoff of living in a shared space. For example, you might not use the pool or rooftop, but you need to pay for them anyway.
You Probably Won’t Save on Taxes
HOA dues are typically not tax deductible for the home you live in. If you own a rental property and pay HOA fees, you could get a tax break. The home office deduction might also provide some relief if you have an office in your home.
Check with a CPA or tax preparer to find out whether you can get any tax savings for your HOA payments.
You May Need to Pay Dues at Closing
When buying a home with HOA dues, be ready to pay for every day you own the property, starting on day one. You may see a line item on your closing papers showing HOA dues.
HOAs keep a reserve fund, which can help absorb large expenses and surprises. View HOA financial statements, and look at how much the reserve fund is before you buy a home with an HOA. A low reserve fund is a sign that dues may increase soon, and assessments are more likely when there’s no rainy-day fund.
You Still Need Insurance
HOA dues pay for a master insurance policy. But those policies typically don’t cover your personal property, the home you live in, the inside of your unit, damage that comes from your unit, or your personal liability.
Speak with an insurance provider to determine what your risk is, and find out what type of policy makes the most sense for you. Price those policies before you buy an HOA-managed property so you have a clear picture of your future costs.
The Bottom Line: Paying HOA Fees Is Just As Important As Paying Your Mortgage
If you’re seriously considering joining an HOA community, make sure you factor HOA fees into your monthly budget. If you can afford it and love the lifestyle, an HOA comes with serious benefits – just don’t forget the extra costs.
Ready to buy a home within a homeowners association? Take the first step by applying for preapproval online today.