If you are looking to purchase a condominium, townhouse or other type of property in a planned union development, such as a gate community or subdivision, you will likely have to account for an extra monthly/yearly fee.
The fees paid to a homeowners association cover the cost of upkeep of common areas and buildings, i.e. landscaping, elevators, swimming pools, clubhouses, parking areas, fitness rooms, security gates, roofing and other structural areas of the shared building(s). A homeowners association is an organization that manages and upholds the rules, known as covenants, of a housing development, subdivision or condominium building, as well as distributes homeowners’ association fees to appropriate upkeep projects.
Generally, HOA fees are distributed into two divisions:
- Current year operations. These fees are designated to cover items such as landscaping, snow removal, pool maintenance, insurance and water.
- Reserves. The remaining portion of monthly fees is placed into a reserve account to cover long-term, larger-cost repairs and replacements like a new roof for a common building.
HOA fees will typically vary greatly in range depending on where you live. The more upscale the building and amenities, the higher the price tag. In addition to monthly fees, if a major expense arises and there aren’t enough funds in the HOA’s reserves to cover the expense, the HOA may charge an extra fee. HOA fees are always subject to change, so be aware.
HOA fees influence the amount your lender will approve you to purchase. When checking to see if you qualify for a home loan, lenders look at your front-end and back-end ratio. Your front-end ratio determines how much you will be spending on your total monthly mortgage payment (principal, interest, taxes, insurance and HOA fees) in comparison to your gross monthly income. Typically, lenders want this ratio to be below 28 percent.
Your back-end ratio includes your monthly mortgage expenses mentioned above as well as the minimum monthly payments on debt you owe, such as student loans, credit card debt and automobile loans, in comparison to your monthly gross income. Ideally, this ratio should not surpass 36 percent of your monthly gross income.
If you are interested in purchasing a property that belongs to a HOA, it is important to ask the correct questions to determine how belonging to a HOA will affect your housing budget:
- How are HOA fee increases determined?
- How often to do increases occur?
- What is the average yearly increase?
- How large is the HOA’s reserve fund?
- What do your monthly HOA dues cover? What portion of your dues goes to current operations vs. reserves?
If purchasing a home within a Homeowners’ Association is of interest to you, speak with your loan officer on how the cost of membership will affect your home affordability.
Still can't decide what type of housing is right for you? Try our past blog post on figuring out what's best for you!
Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for first time homebuyers.