I own a condo that is part of a homeowners association. I fell behind in HOA dues and now the HOA is foreclosing on its lien. I also have a first and second mortgage on my condo. If the HOA forecloses, will it pay off those two mortgages?
No. If the HOA forecloses on its lien, you're still on the hook for paying the mortgage debt. Here's why.
Promissory Notes and Mortgages
When you take out a loan to purchase a home, you are required to sign two documents: a mortgage (or deed of trust) and a promissory note. The mortgage creates the security interest in the property. It is the mortgage that enables the lender to foreclose if you default on the payments. The promissory note, on the other hand, contains your promise to repay the amount you borrowed. This is what makes you personally responsible for the debt.
First Mortgage Liens in an HOA Foreclosure
First-mortgage liens are usually superior to HOA liens. Consequently, the first mortgage remains on title to the property even after an HOA foreclosure has been completed. The HOA (or whoever purchases the property at the foreclosure sale) takes title subject to that lien. (Learn more in Nolo's article HOA Liens & Foreclosures: An Overview.)
You’re Still Liable for the Debt
The HOA is not obligated to pay the first mortgage holder if it obtains title to the property as a result of the foreclosure, even though the first mortgage lien remains on the property. This is because the HOA did not sign the promissory note -- you did. So, the personal obligation to pay the debt remains with you.
The HOA’s Options After Foreclosing
Assuming that you’ll stop making payments to the first mortgage holder if the HOA forecloses (or maybe you are already in default on your mortgage payments), the HOA can then choose to:
- pay the first mortgage holder to prevent it from foreclosing (though it has no obligation to do so and probably won’t), or
- let the first mortgage holder foreclose. (HOAs do this sometimes so that the home will turn over to a new owner at the foreclosure sale, either to the first mortgage holder or a third-party purchaser, who will then pay the assessments.)
In the meantime, the HOA might rent out the home on a short-term basis until the first mortgage holder’s foreclosure is complete. (Though it may be guilty of rent skimming if it does not pass the rent along to the senior mortgage holder.)
Second Mortgage Liens in an HOA Foreclosure
Following an HOA foreclosure, all liens that are junior to the HOA’s lien (such as a second mortgage) are extinguished and the liens are removed from the property title. While the collateral for the debt has been eliminated, your obligation to pay remains in place since you signed a promissory note. The second mortgage holder may then sue you to collect the debt. (Learn more in Nolo’s article What Happens to Liens and Second Mortgages in Foreclosure?)