If I don't have enough equity to cover my mortgage, will my HOA foreclose for nonpayment of dues?
Even if your mortgage is underwater, your homeowners association (HOA) might still foreclose for nonpayment of dues.
Even if your home is underwater (where you don’t have enough equity in the property to pay off the mortgage), your HOA could foreclose on your home if you don’t pay your dues and assessments. Why would an HOA do this? There are several possible reasons.
What Happens to the Mortgage if the HOA Forecloses
Before trying to figure out why an HOA might want to foreclose in this situation, you first need to understand the priority of an HOA lien. (Priority in this context means the order in which liens are paid out of the proceeds from a foreclosure sale.)
If you stop paying your HOA dues, the association will be able to get a lien on your property. HOA liens typically have a lower priority (are junior) to a first mortgage. This means that the first-mortgage lien will stay on the property following the HOA foreclosure and the purchaser at the foreclosure sale will take ownership of the property subject to that lien. (Learn more in Nolo's article HOA Liens & Foreclosures: An Overview.)
Below are some possible reasons why the HOA might want to foreclose even though it would likely take title to the property subject to your mortgage as a result of its foreclosure.
The HOA May Want the Mortgage Holder to Foreclose
Just because the mortgage lien remains on the property, doesn’t mean the HOA will make the mortgage payments if it obtains title to the property as a result of the foreclosure. You are still obligated to make the payments.
The HOA knows that if it forecloses, you’ll probably stop making your mortgage payments. Then the mortgage holder will foreclose and, once that foreclosure is complete, the home will turn over to a new owner at the foreclosure sale, either to the mortgage holder or a third-party purchaser. The mortgage holder or new owner will start paying the HOA dues at that time. This way, the HOA starts generating income off your property again.
The HOA May Want to Get Rid of Your Renters
Another reason that an HOA may foreclose even if your home is underwater is if you have rented out the property to undesirable tenants. (For example, perhaps your tenants are constantly in violation of the CC&Rs.) If you don’t take steps to evict the tenants, the HOA may see no other alternative to stop the conduct of your troublesome renters other than taking possession of the property.
The HOA Might Want to Try to Rent Out the Home Itself
The HOA might be looking to rent out the property, at least until the mortgage holder forecloses. (Though it must pass the rent along to the senior mortgage holder or else it may be guilty of rent skimming.)
The HOA’s Lien Could be a Super Lien
Some states give certain HOA liens super priority. If your state permits HOA super liens, a certain number of months worth of HOA dues are senior to even a first mortgage. If the HOA forecloses a super lien, it wipes out a senior mortgage. To prevent this, the mortgage holder will often pay off the super lien if the HOA starts a foreclosure. (Learn more in Nolo’s article Homeowners Association Super Liens.)