These days, when you buy a home that is part of a planned, covenanted community, you will most likely pay monthly fees and assessments to a homeowners’ association. If you become delinquent in paying those fees and assessments, the homeowners’ association will be able to get a lien on your home that could lead to a foreclosure. Read on to learn more about homeowners’ association liens and how they can be foreclosed.
To fully understand HOA liens and how they work, you must understand the basic terms involved in covenanted communities.
Homeowners’ Association (HOA). An HOA is a legal entity set up to manage and maintain the neighborhood. Its members usually consist of homeowners in the community. The original developer of the community typically creates the HOA. The rules of the community are typically set forth in what is called the Declaration of Covenants, Conditions, and Restrictions (CC&Rs). The main functions of the HOA are:
HOA communities may consist of single-family homes, townhomes, or condominiums, though separate state laws may govern homeowner associations in subdivision communities and condominium associations.
HOA Fees. Homeowners that live in a covenanted community will often be required to pay a periodic fee to the HOA to cover maintaining the community. The HOA will collect fees to pay for things like landscaping, security, snow removal, as well as repairs and maintenance for community facilities (such as pools, tennis courts, workout rooms, and clubhouses). The fees also pay the salaries of HOA employees. To determine the amount that each homeowner must pay, the HOA will typically develop a budget and divide the total expenses by the number of homes in the community. The homeowner must pay his or her share on a monthly basis or other fixed schedule throughout the year.
HOA Special Assessments. At times, the HOA may levy special assessments for one-time expenses if the HOA's reserve funds will not cover the cost of a major repair or improvement. For example, an HOA may levy a special assessment to pay for a new roof for the community clubhouse or to pay for a new road.
Almost all HOAs have the power to place a lien on the homeowner’s property if he or she becomes delinquent in paying the monthly fees and/or any special assessments (collectively referred to as “assessments”). Once any HOA homeowner becomes delinquent on the assessments, a lien will usually automatically attach to that homeowner's property, typically as of the date the assessments became due. In some cases, the HOA will record a lien with the county recorder to provide public notice that the lien exists, regardless of whether recordation is required.
Depending on the terms in the CC&Rs, the homeowner may be liable for charges such as:
Not only will an assessment lien cloud the title to the property, thus hindering the homeowner’s ability to sell or refinance, but also it can be foreclosed and the property sold to satisfy the debt.
If an HOA has a lien on a homeowner’s property, it may foreclose on that lien (even if there is a mortgage on the property) as permitted by the CC&Rs and state law. The HOA can foreclose either through judicial foreclosure or a nonjudicial foreclosure, depending on state law and the terms in the CC&Rs.
To judicially foreclose an assessment lien, the HOA must file a lawsuit against the homeowner and obtain a judgment from the court granting permission to sell the home to satisfy the HOA’s lien. To nonjudicially foreclose, the HOA does not have to go through state court, but rather follows specific procedures as dictated by state law, as well as the CC&Rs. (Learn more about the difference between judicial and nonjudicial foreclosure.)
Often, the CC&Rs and/or state law contain a provision that the HOA lien has priority over all liens and encumbrances recorded after the recordation of the declaration of CC&Rs except a first mortgage (or deed of trust) that was recorded before the date the assessment became delinquent. If this is the case, the first mortgage lien will remain on the property following the HOA foreclosure.
The borrower remains 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—the borrower did. So, the personal obligation to pay the debt remains with the borrower.
An HOA's options after foreclosing. Assuming that the borrower stops making payments to the first mortgage holder if the HOA forecloses (or maybe the borrower is already in default on mortgage payments), the HOA can then choose to:
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.)
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, the borrower's obligation to pay remains in place because the borrower signed a promissory note. The second mortgage holder may then sue the borrower to collect the debt. (Learn more in Nolo’s article What Happens to Liens and Second Mortgages in Foreclosure?)
State laws often place particular due process requirements on HOAs regarding how and when they can foreclose an assessment lien. For example, in California, the delinquent assessments must equal or exceed $1,800 or the delinquency must be at least 12 months old before the HOA can initiate foreclosure proceedings (Cal. Civ. Code § 1367.4). To learn about the laws governing HOA foreclosures in your state, review your state’s statutes. (To find out how to do your own legal research, see Nolo’s Laws and Legal Research section.) Or talk to a local real estate or foreclosure attorney.
While states often restrict the circumstances under which an HOA can foreclose, the bottom line is that, in most cases, an HOA can eventually foreclose if you default on assessments in much the same way a lender would foreclose a defaulted mortgage.
If your state provides a right of redemption after the foreclosure sale, you can repurchase the property.
Redemption laws vary widely from state to state. In California, if the HOA forecloses using a nonjudicial foreclosure process, you get a 90-day right of redemption. This allows you to effectively buy the property back after the foreclosure by paying the amount of the lien, plus costs, fees, and other allowable charges. (California law also requires you to reimburse the purchaser for any repairs made to the property.) In Texas, the redemption period is 180 days from date the HOA mails written notice of the sale to the homeowner.
The redemption timeframe may be longer or shorter depending on which state you live in. And some states don't provide a right of redemption at all.
Your credit score influences the credit that lenders will offer you, as well as the terms, like the interest rate. A FICO credit score, for example, ranges from 300–850. A foreclosure will likely damage your FICO score by reducing it by at least 100 points, probably more. The actual number of points the score will drop varies from one person to the next. If you had a really high credit score before the foreclosure, the drop will be more severe. But if your credit score is already pretty low, there will be less of an impact. Missed HOA payments might also lower your score, if the HOA reports them to the credit reporting bureaus.
When you apply for a mortgage, one of the first things a potential lender will take into consideration when deciding whether or not to lend to you is your credit score. Lenders prefer to make loans to borrowers who are most likely to repay them, such as those people with the highest scores. If you have a low score as a result of a foreclosure, you may be able to get a mortgage loan eventually, but the interest rate will probably be higher or you may have to put more money down.
If an HOA initiates a foreclosure against you, consider talking to a foreclosure attorney to learn about different options that may be available to you.