If you live in a planned neighborhood, you might be part of a homeowners' association (HOA), a nonprofit corporation responsible for managing and maintaining the community. The HOA creates and enforces the rules of the community.
When you join the community, you agree to pay assessments, often called “HOA fees,” and follow the rules in the HOA’s governing documents, like the Covenants, Conditions, and Restrictions (CC&Rs).
If you don’t pay the fees or follow the community’s rules, you might eventually face serious consequences, like a lawsuit or foreclosure. A foreclosure, and perhaps the unpaid HOA fees, will likely damage your credit scores.
How Do HOA Fees Work?
An HOA usually collects regular and special assessments (fees) from each household or unit in the community.
How Are HOA Fees Determined?
An HOA has a board of directors. Every year, the board comes up with a budget for the community and decides how much to charge each unit or household as a monthly (or yearly or quarterly) fee.
However, sometimes the board's predictions aren't accurate. So, the HOA might need to come up with more funds. In this situation, the board usually has the authority to impose a special assessment to cover the one-time expense of a major repair or improvement.
What Is an HOA Assessments Lien?
In most cases, the HOA has a right to an automatic lien on your home if you don't pay the assessments. If the CC&Rs allow it, the lien attaches to the property, usually as of:
- the date the assessments are due
- the date when the CC&Rs were recorded in the land records, or
- when the HOA recorded a notice of lien in the land records.
The lien is created when you’re late in paying the fees. The HOA doesn’t have to go to court to get a judgment first. (With a judgment lien, on the other hand, a creditor has to get a judgment from a court before placing a lien on your home.)
The HOA will often prepare a "Notice of Lien" or a similarly titled document describing the property and the amount you owe the HOA. Under some states’ laws, the HOA has to record the Notice of Lien at the county recorder’s office to make the lien valid. In other states, the HOA doesn’t have to record the lien.
Typically, the HOA will record the lien, even if state law doesn’t require it, to get it on the public record. You could then have problems if you try to refinance or sell your home because any potential lender or buyer will see it when examining your title to the property.
Why an HOA Lien Could Pose a Problem
A lien puts people on notice that if they lend you money using the house as collateral or buy the house with this lien on the title, they're lower in priority than the HOA lien. Priority determines the parties’ rights after a foreclosure.
So, a potential lender will be concerned that the HOA might foreclose, and the lender could lose out on some or all the money it’s owed. After a foreclosure sale, the liens are paid off in order of their priority. But sometimes, a foreclosure sale doesn’t bring in enough money to pay off all the liens. And a potential buyer will be concerned about losing the right to the home if the HOA forecloses.
Because of these consequences, liens are appropriately known as a “cloud on title.”
What Legal Action Can an HOA Take to Collect an Assessments Debt?
While not every HOA will take the following steps in the following order if you don't pay the HOA fees, most HOAs tend to take these actions. However, state law might require different ones.
Charge Interest and Late Fees
If you don’t pay the fees, the HOA will probably charge interest and late fees on the unpaid amounts.
You’ll probably get a notice of missed payment or a notice demanding payment. The notice will probably tell you how much you owe and tell you what will happen if you don’t pay.
Take Away Your Privileges
The HOA might prohibit you from using any common areas, like the clubhouse, the pool, or the gym, until you catch up on the amounts you owe.
Sue You in Court for a Money Judgment
If you fall behind in paying the assessments, an HOA might file a lawsuit against you for a money judgment. Once a court issues a judgment in favor of the HOA, the HOA can ordinarily take money from your bank account (called a “levy”) or garnish your wages to collect the amount owed.
Foreclose
Remember, most HOAs have the right to a lien on your home if you don’t pay your fees. If the HOA thinks you don’t have any funds in your bank account or from a job to pay a money judgment, it might choose to foreclose the lien because the proceeds from the foreclosure sale go towards paying off the amount you owe.
In some states, an HOA can’t foreclose until you’re a specific number of months or a certain amount of money behind in assessments. For example, a California HOA can’t start a foreclosure unless the assessments are more than 12 months delinquent or the past-due assessments equal $1,800 or more.
What Legal Action Can an HOA Take If You Break the HOA's Rules?
If you , say you paint your mailbox an unapproved color, you’ll probably get a letter or two telling you to repaint the mailbox. If you don’t repaint it, the HOA might take one or more of the following actions.
Fine You
The HOA could assess a fine against you for each day you don’t fix the problem, say $100 per day.
Take the Matter Into Their Own Hands
The HOA might go onto your property to correct the issue and charge you for the cost of repainting the mailbox.
Suspend Your Right to Use the Common Facilities
The HOA might prohibit you from using any common areas, like the clubhouse, the pool, or the gym, until you take care of the matter.
File a Lawsuit Against You
If you don’t correct the problem or the HOA doesn’t fix it for you, the HOA might file a lawsuit against you, asking the court to order you to repaint the mailbox.
The HOA might also ask the court for a money judgment against you for any unpaid fines. Once a court issues a money judgment in favor of the HOA, the HOA can usually take money from your bank account or garnish your wages to collect the amount owed.
The HOA Might Foreclose
An unpaid fine might not automatically become a lien, which differs from unpaid dues and assessments. But some states allow the association to include fines in an assessments lien.
Then, depending on state law and the HOA’s governing documents, the HOA might foreclose that lien. And while some states don't allow liens for unpaid fines, others (to reiterate) have a law that says an assessments lien may include fines.
Even in states that allow liens for unpaid fines, the law might allow such liens only under specific circ*mstances, such as when the unpaid fines exceed a certain threshold. For example, in Florida, fines must be at least $1,000, or they can’t become a lien against the property. (Condominium association fines can't become a lien in Florida.)
State Restrictions on Foreclosures for Unpaid Fines
Just as some states forbid liens for unpaid fines, some restrict or prohibit foreclosures when the HOA lien consists only of unpaid fines and related costs like attorneys’ fees.
In North Carolina, for instance, the most common foreclosure method is nonjudicial. But under North Carolina law, an HOA can’t use a nonjudicial process to foreclose an HOA lien if the lien consists solely of fines, interest on unpaid fines, or attorneys' fees that are associated with fines.
Instead, the HOA must foreclose judicially by filing a lawsuit. So, the homeowners get one last chance to convince someone (a court) that they don’t deserve to lose their home over a dispute with the HOA.
In Texas, an HOA can’t foreclose a lien at all (judicially or nonjudicially) that consists solely of fines and attorney's fees associated with those fines. However, as mentioned earlier, once the HOA gets a money judgment, it can potentially take money from the homeowner’s bank account or garnish the homeowner’s wages.
And, if the lien also includes other amounts besides fines and related attorneys’ fees, such as unpaid assessments, the HOA can probably foreclose.
How an HOA Foreclosure Hurts Your Credit Scores
Again, a foreclosure by your HOA will likely hurt your credit scores.
How Credit Reporting Typically Works: Late Payments
Ordinarily, if a person doesn't make a payment on a debt, like for a mortgage or a credit card, the creditor reports that borrower to the three main credit bureaus: Equifax, Experian, and Transunion. The delinquency is then listed in the person’s credit report based on the level of delinquency, such as late 30 days, 60 days, 90 days, and so forth, which lowers the individual’s credit scores.
The more times you’re late and the longer you go without making a payment, the lower your scores will go.
Late Payments Might Not Affect Your Credit Scores, Foreclosure Probably Will
To report delinquencies to the three major credit bureaus, a company has to become a member. Sometimes, an HOA won’t sign up for membership due to the cost and certain reporting requirements.
So, your HOA might not report delinquent payments to the credit bureaus; some do, some don't. However, if the HOA turns the debt over to a collection agency, the agency could report the debt. And, if you don’t get current on the debt, the HOA will probably foreclose. If you go through a foreclosure, the foreclosure will probably show up in your credit history, even if the HOA doesn’t report it.
Why an HOA Foreclosure Will Probably Affect Your Credit History
An HOA foreclosure is judicial or nonjudicial. A judicial foreclosure involves the court system. In a nonjudicial foreclosure, the foreclosing party follows a series of out-of-court steps, which typically involves recording a notice in the land records. Both court filings and land records are public records.
Credit reporting agencies use private companies to search public records for information like lawsuits and foreclosures. If the bureaus find out about your foreclosure from the public record, which they usually do, they'll add this information to your credit reports.
Once reported, an HOA foreclosure typically affects a person's credit scores in the same way a regular, home foreclosure affects credit scores.
How Much an HOA Foreclosure Damages Your Score
According to FICO, a foreclosure could lower a person’s credit scores by 100 points or more. The exact number of points that will fall off your scores depends primarily on how good your credit scores were before the foreclosure. Someone who has high credit scores before a foreclosure loses more points. A foreclosure has less impact on someone who already has low credit scores.
FICO says that if your credit score was 680 before a foreclosure (generally considered a good FICO score) after the foreclosure, it will end up somewhere between 575 and 595, which is a decline of 85 to 105 points. But if your credit score was 780 before a foreclosure (usually considered as a very good FICO score), the foreclosure lowers your score to between 620 and 640, a drop of 140 to 160 points.
Because FICO scores are based on what’s in your credit reports, and the three main credit bureaus tend to have slightly varying information, each bureau probably has different credit scores for you.
How Your Credit Score Affects Your Ability to Get Credit
Creditors typically offer loans and other forms of credit, like credit cards, at good rates to consumers with high credit scores. Consumers with low credit scores who apply for new credit, however, ordinarily have to pay higher rates or fees or the creditor rejects the consumer's request for credit outright.
While foreclosure information stays on your credit report for seven years, your FICO score can start to recover in as few as two years if you stay current on your other debts. However, until your credit scores begin to rebound, a potential creditor might turn you down if you apply for a new loan or the creditor might require you to pay a higher interest rate or fees.
How to Stop an HOA Foreclosure
If you’re facing a potential foreclosure by your HOA, you might be able to ask for (or the HOA or state law might require) a preforeclosure meeting to discuss the violation. At the meeting, you could be able to negotiate a resolution to the problem, such as agreeing immediately to begin a payment program to pay off your fees or fines in exchange for the HOA’s agreement to hold off on foreclosure.
And if you end up losing your home to an HOA foreclosure, you might be able to get your property back after the sale. Some states have a law that allows a foreclosed homeowner to redeem the home following an HOA foreclosure.
Read More Articles
Read more about how to stop an HOA foreclosure.
Learn about the right to redeem the property after an HOA forecloses.
Talk to a Lawyer
Consider contacting a foreclosure lawyer to learn about different options and homeowner rights in your state regarding HOA foreclosures.
