If you own a home that is part of a homeowners association (HOA) and fall behind in your dues or assessments, the HOA may foreclose on your home. When this happens, your credit score will take a major hit.
An HOA foreclosure is like a residential foreclosure in that it will be either judicial or nonjudicial, and eventually the property will be sold at a foreclosure sale to the highest bidder. (To learn more about the difference between judicial and nonjudicial foreclosure, see Nolo’s article Will Your Foreclosure Take Place In or Out of Court?)
Like any residential foreclosure, a foreclosure conducted by an HOA will appear on your credit history and will reduce your credit score significantly. (Learn more about HOA foreclosures.)
Your credit score influences the credit that lenders will offer you, as well as the terms (such as the interest rate). A FICO credit score, for example, ranges from 300–850.
A foreclosure will severely damage your FICO score by reducing it at least 100 points, probably more. (Find out more in Nolo’s article Foreclosure and Your Credit Score.) The actual reduction in credit score based on a foreclosure varies from one person to the next. If you had a very high credit score before the HOA’s foreclsoure, the drop will be more severe. If your credit score is already pretty low, there will be less of an impact.
For example, according to FICO’s website, if your credit score is 680 and you go through a foreclosure, that will drop your score to 575-595. However if your score was 780, a foreclosure will reduce the score to 620-640. The reason for this is that if you start off with a lower score, the score already reflects your past difficulties with debt. The addition of one more indicator, like a foreclosure, on your credit report is not as significant as it is for someone with no history of risky borrowing patterns. (Go to www.myfico.com to learn more.)
In addition to the foreclosure, any reports of past-due HOA payments can also reduce your score. It is possible that the HOA may not report your missed payments to the credit reporting agencies since, in order to make reports, it would have to pay a fee to get a membership to one or all three credit reporting agencies. However, if the HOA turns the debt over to a collection agency, these companies usually have reporting contracts with the credit reporting agencies and will make sure that the delinquent account appears on your credit report.