Homes in common interest developments and other planned communities are usually governed by a homeowners’ association. These associations collect fees and assessments from homeowners. Failing to pay fees and assessments can result in a lien that might eventually lead to a foreclosure. The main HOA fee is a monthly or other periodic fee paid for maintenance of the community, such as security, repairs, and landscaping. In addition to this fee, the HOA might require residents of the community to pay special assessments on a one-time basis. These might involve improving a community road or making a major repair to a community building.
Some states impose due process requirements on HOA foreclosures. These may provide a minimum amount of debt before the HOA can foreclose or a minimum amount of time to allow the homeowner to catch up on payments.
Liens automatically attach to the property of a homeowner who fails to pay an HOA fee or assessment. The HOA may record the lien with the county records office, but this is usually not required. To get rid of the lien, the homeowner would need to pay off not only the missed fees or assessments but also any related penalties, interest, and sometimes fines and attorney fees. In addition to posing the risk of a foreclosure, an HOA lien can prevent a homeowner from selling the property because they do not have clear title while the lien exists.
The CC&Rs (Covenants, Conditions, and Restrictions) that govern the community usually give the HOA a right to foreclose on a lien, even if the property is also subject to a mortgage. It can choose either judicial foreclosure or non-judicial foreclosure, as long as the CC&Rs and state law permit. The main difference between these processes is that judicial foreclosure involves filing a lawsuit and going to court, while non-judicial foreclosure does not.
Mortgages in HOA Foreclosures
An HOA lien typically will take priority over any other liens on the property except the first mortgage, as long as it was recorded before the HOA lien arose. This first mortgage will remain with the property, but the HOA will not be required to pay off the mortgage if it takes title to the home. Instead, the homeowner who took out the mortgage still will need to pay off the debt to the lender.
If the HOA forecloses on the home, the homeowner may stop making payments to the mortgage holder. While the HOA could pay the mortgage holder, it probably will allow the mortgage holder to foreclose and sell the property to a new owner at a foreclosure sale. This benefits the HOA because the new owner will be responsible for paying fees and assessments.
On the other hand, a second or subsequent mortgage, or any other lien junior to the HOA’s lien, will be removed from the property and will not further encumber the title. However, any promissory notes that the homeowner signed will leave them personally liable to pay off these debts. They might face lawsuits from the holders of these liens.
The Aftermath of an HOA Foreclosure
Some states allow a homeowner to redeem their home after a foreclosure. In other words, you can buy back your home by paying off the amount that you owe the HOA, in addition to any related interest, fees, and penalties. If the HOA made repairs to your home after the foreclosure, you may need to compensate it for the repairs. The right of redemption may last for only a few months and varies widely from state to state.
You may suffer significant damage to your credit score based on an HOA foreclosure. This can affect your ability to get a loan for a home in the future and may require you to accept a higher interest rate or make a larger down payment. However, if your credit score was already low, you may suffer a less significant impact than if you had a strong credit score. Simply missing a payment, even if the HOA does not foreclose, may weaken your credit score as well if the HOA reports the missed payment to credit bureaus.