If you fail to pay your homeowners’ association dues or assessments, the HOA may foreclose on your house.
When you purchase a house in a covenanted planned community, you will almost certainly be required to pay fees and assessments (often referred to as “assessments”) to a homeowners’ organization (HOA). Most HOAs have the authority to get a lien on a property if homeowners fail to pay their assessments in accordance with the Covenants, Conditions, and Restrictions (CC&Rs) and state law.
The lien normally attaches to the property automatically, usually as of the day the assessments become due. Even though state law does not compel it, the HOA may publish its lien in county records to give public notice that the lien exists. Once the HOA has a lien on the property, it may elect to foreclose in order to compel the sale of the house to a new owner.
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What Exactly Is a Homeowner’s Association (HOA)?
An HOA is a legal body established to govern and preserve a specific community. Its members are mostly neighborhood homeowners. The HOA is usually established by the original developer of the neighborhood. The regulations of the community are often outlined in what is known as the CC&Rs.
The HOA’s primary responsibilities are as follows:
Collect assessments and dues, as well as enforce community regulations.
HOA communities may be made up of single-family houses, townhomes, or condos, while homeowners’ organizations in subdivision developments and condominium owners’ associations may be governed by distinct state laws (COAs).
How Association Fees Work
Homeowners in the community are often obliged to pay a monthly fee to the HOA in order for the community to be maintained. These payments (or “dues”) are collected by the HOA to cover costs such as landscaping, security, and snow removal, as well as repairs and upkeep for common amenities such as pools, tennis courts, gym rooms, and clubhouses. The payments help cover the wages of HOA workers.
The HOA normally establishes a budget and divides the total expenditures by the number of properties in the neighborhood to calculate the amount that each homeowner must pay. Homeowners are often required to pay their part on a monthly or other predetermined schedule throughout the year.
What Are Homeowners Association Special Assessments?
If the HOA’s reserve funds are insufficient to pay the cost of a substantial repair or upgrade, the HOA may impose a special charge. An HOA, for example, may levy a special charge to pay for a new roof for the community clubhouse or a new road.
HOA Liens and How They Work
Once a homeowner falls behind on their assessments, a HOA lien is generally automatically attached to their property. The lien normally attaches as of the day the assessments were due. In certain circumstances, regardless of whether recordation is needed, the HOA will record a lien with the county recorder to give public notice that the lien exists.
Depending on the conditions of the CC&Rs, the homeowner may be responsible for costs such as:
Unpaid assessments are subject to late charges, reasonable collection expenses (for example, lawyers’ fees), penalties (in certain situations), and interest.
An assessment lien will not only obscure the title to the property, making it difficult for the homeowner to sell or refinance the house, but the property may also be repossessed. The property is sold to settle the debt in a HOA foreclosure, just as it is in a standard home loan foreclosure.
How Do HOA Liens Get Foreclosed?
If a HOA has a lien on a homeowner’s property, it may foreclose, even if the house is already mortgaged, as allowed by the CC&Rs and state law. Depending on state law and the conditions of the CC&Rs, the HOA may foreclose by judicial foreclosure or nonjudicial foreclosure.
To judicially foreclose an assessment debt, the HOA must sue the homeowner and secure a court decision allowing authorization to sell the house to settle the HOA’s claim. The HOA does not have to go to state court to foreclose nonjudicially, but rather follows precise processes prescribed by state law as well as the CC&Rs.
What Happens If a HOA Forecloses on a Mortgage?
Often, a HOA’s CC&Rs or state laws include a clause stating that a HOA lien takes precedence over all liens and encumbrances filed after the declaration of CC&Rs, with the exception of a first mortgage or deed of trust issued before the day the assessments became late. Following a HOA foreclosure, the initial mortgage lien remains on the property in this case. (However, HOA super liens are an another situation.)
The loan is still owed by the borrower. Because the HOA did not sign the promissory note (the borrower did), the HOA is not required to pay the first mortgage holder if it acquires possession of the property as a consequence of the foreclosure, even if the first mortgage lien remains on the property. As a result, the borrower’s personal duty to repay the loan remains.
After-foreclosure alternatives for a HOA. If the HOA forecloses and the borrower stops making payments to the first mortgage holder (or if the borrower is already in arrears on mortgage payments), the HOA might opt to:
Pay the first mortgage holder to keep it from foreclosing, despite the fact that it has no responsibility to do so and is unlikely to do so, or let the first mortgage holder foreclose.
HOAs may occasionally allow a mortgage holder to foreclose so that the house can be sold to a new owner, either the initial mortgage holder or a third-party purchaser, who will then pay the assessments.
Meanwhile, until the initial mortgage holder’s foreclosure is completed, the HOA may rent out the house on a short-term basis. However, if it does not pass the rent through to the senior mortgage holder, it may be guilty of rent skimming.
HOA Foreclosure with Second Mortgage Liens
Following a HOA foreclosure, any junior liens, such as a second mortgage, are extinguished and the liens are erased from the property title. While the debt’s collateral has been removed, the borrower’s duty to pay remains since the borrower signed a promissory note. To recover the loan, the second mortgage holder may sue the borrower.
HOA Foreclosure Limitations
State laws often impose certain due process requirements on HOAs in terms of how and when they might foreclose an assessment lien. In California, for example, outstanding assessments must equal or exceed $1,800 or be at least 12 months old before the HOA may commence foreclosure procedures (Cal. Civ. Code 1367.4). Review your state’s legislation to learn about the laws regarding HOA foreclosures in your state. Alternatively, contact a local real estate or foreclosure attorney.
While states often limit the conditions under which a HOA might foreclose, the simple truth is that a HOA can ultimately foreclose if you fail on assessments, just like a lender would foreclose on a defaulted mortgage.
Reclaiming Your Home After a HOA Foreclosure
You may repurchase the property if your state allows for redemption after the foreclosure sale. Redemption rules differ greatly from one state to the next. If the HOA forecloses via a nonjudicial foreclosure procedure in California, you have a 90-day right of redemption. During the redemption period, you may reclaim the property after the foreclosure by paying the lien amount plus costs, fees, and other permitted charges. You must also compensate the purchaser for any repairs done to the property under California law. In Texas, the redemption period is 180 days from the moment the homeowner receives written notification of the sale from the HOA. 209.011) (Tex. Prop. Code Ann. However, the regulations governing condominium organizations in Texas vary.
Depending on your state’s legislation, the redemption period may be greater or shorter. Even if your state law does not specifically provide for a right of redemption after a HOA foreclosure, your state may have another legislation that allows for a redemption period following the foreclosure of a mortgage debt, which may also apply to a HOA foreclosure. However, other jurisdictions do not recognize the right to redemption at all.
Consult an Attorney
If your HOA begins a foreclosure against you, you should consult with a foreclosure attorney to learn about your alternatives.