If you’re looking to buy a piece of property, knowing whether the home you want to purchase is located in a community run by a homeowners association (HOA) is very important. While HOAs often spare homeowners from some responsibilities, there are specific things you should be aware of before purchasing a home that’s part of a gated community, townhome complex, condominium, or any other type of “planned development” governed by an HOA.
What Exactly Is an HOA?
An HOA is a membership group, which represents the homeowners who live in a community that offers an enticing benefit; namely, a low-maintenance lifestyle. In the communities with an HOA, regular tasks, such as basic utilities, lawn care, pest control, as well as cleaning and upkeep of pools, fitness centers, clubhouses, parking lots, and other common areas, are taken care of by the HOA in exchange for a quarterly or monthly fee.
Some HOAs also provide certain security services, including security cameras, doormen, and/or security guards on site. In addition, the HOAs create rules that prevent homeowners from making changes to their homes that could negatively impact the overall appearance of the neighborhood along with the market value of the properties within the community.
One of the most important aspects related to moving into a neighborhood governed by an HOA is that fees can range widely. The typical fee ranges between $100 and $700, although some communities also offer luxury services and amenities that can cost up to $4,000 per month. HOA fees are affected by a series of factors, including the location, amenities and services provided, number of homes in the neighborhood, and number of foreclosures within the community. Usually, fewer homes and/or a high number of foreclosures translate into higher HOA fees.
Therefore, when contemplating a home purchase in a planned development, it’s not enough to be able to afford the monthly mortgage payment, property taxes, and insurance. You also need to factor in the HOA dues that you’ll have to pay. Because there are a wide variety of services and amenities that make up the HOA fees, you should compare different communities and decide which offerings, rules, and fees best fit your preferences, needs, and budget.
HOA Fees Could Adversely Impact Your Ability to Qualify for a Mortgage
Besides the fact that you’ll need to cover HOA fees, which could add a substantial amount to your housing expenses, buying a home in a community with an HOA might affect both your ability to qualify for a mortgage and the loan amount you could obtain.
That’s because, similar to property taxes and homeowners insurance, HOA fees are counted in the debt-to-income (DTI) ratio that lenders use to calculate lending amount limits. Expressed as a percentage, the DTI ratio indicates how much of your monthly gross income goes toward payments for mortgage, property taxes, insurance, HOA dues, credit card debt, and other debt obligations. Put simply, by comparing how much you owe to how much you earn each month, lenders can decide how large a mortgage you’ll be able to afford and whether approving your mortgage application is the right choice for them. Generally, lenders require a DTI ratio of 36% or less.
Here is an example that could help you better understand how HOA fees can affect your ability to qualify for the mortgage amount you need in order to buy the home you want. Let's assume that your gross monthly income is $5,800 and your recurring monthly payment for auto loan and credit card debt equals $700. If you intend to take out a 30-year $224,000 mortgage, with a 6% interest rate* and 20% down, in order to purchase a $280,000 home in a community with a monthly HOA fee of $300, your DTI ratio would be 40.4%, which is above the level that most lenders prefer.
In this case, you could look for a less expensive home and apply for a smaller mortgage or check out our government-sponsored programs, which might allow you to qualify for a home loan with a higher DTI ratio. Without the HOA fee, however, your DTI ratio would be only 35.2%, which means that you could qualify for a conventional mortgage and get the amount you need to buy the type of home you want.
Another reason why most lenders consider the HOA fees is that the HOA has the power to foreclose on your property if you stop paying your dues. Because an HOA lien recorded before a mortgage lien has priority in Florida, the lender might be unable to recoup the remaining mortgage balance.
Whether you intend to purchase a home in an HOA-governed community or in a neighborhood that doesn’t have an HOA, feel free to contact our friendly professionals, who are ready to help you find out how much home you can comfortably afford!
*Currently interest rates are much lower than the example given at this time.
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