An Overview of HOA Dues: What They Are and How To Deal With Them
Homeowners association dues can add up. It’s useful to know what exactly you’re paying for. Here’s an overview of common HOA fees.
January 21, 2022
Homeowners associations, also known as HOAs, are formal associations that govern certain condo buildings, subdivisions or neighborhoods. HOAs are quite common, with an estimated 58% of homeowners living in HOA-governed communities.
These community-run organizations share a goal of maintaining the area’s public spaces, preparing for major shared expenses (i.e., a new roof on a condo building), and protecting each member’s property values by enforcing certain rules. Residents who live in an HOA-governed community will need to pay HOA fees, also known as HOA dues.
This article will discuss everything you need to know about homeowner association fees.
What are HOA dues?
HOA dues are a mandatory expense for residents living in communities governed by a homeowner’s association. You could think of them as property taxes but on a hyper-local level.
HOAs are most common in condominiums, but apartment complexes, gated communities and other planned neighborhoods of single-family homes can also have HOAs.
These dues are typically charged monthly, and can add significant costs to your monthly housing expenses. The average HOA fee is around $250 per month. But the figure can be as low as $100 or as much as $1,000, depending on the HOA and neighborhood.
These dues are primarily used to pay for expenses related to shared areas, such as a pool of an apartment complex or the parking lot of a condo building.
Are HOA fees included in mortgage costs?
Typically, HOA fees aren’t included in mortgage costs.
HOA dues are charged directly by the HOA and are separate from other expenses. For example, a homeowner of a 2-bedroom single-family home in a new development may pay:
$1,250 for the mortgage
$450 for property taxes (this may be included in the mortgage payment)
$350 for HOA dues
$300 for utilities
$150 for insurance
But there is some good news, too. One study found that having an HOA increases property values by around 5 to 6%, compared to similar homes without an HOA.
What do HOA fees cover?
Most homeowners associations bundle the following expenses into the monthly or yearly HOA dues:
Maintenance costs for shared areas including pools, community parks, shared laundry rooms, parking lots, etc.
Major repairs such as a new roof on a condominium
Insurance for damage to shared areas
Reserve funds for unexpected expenses in shared areas
In addition to the HOA fees above, some HOA dues also may cover:
City services (sewer, water, etc.)
Access to amenities like a gym or pool
Security and maintenance staff
Each homeowner association is slightly different and governed by specific rules (known as the Covenants, Conditions and Restrictions).
If you’re considering moving to an HOA-governed property, you should request a copy of the HOA’s rules for all the details.
What happens if you don’t pay HOA dues?
HOA fees are mandatory if you live in an HOA community. But what happens if you fall behind?
To start, the HOA will likely send you a notice of late payment, which may include late fees or interest charges. If left unpaid, these bills may be sent to collections, which can affect your credit score.
Eventually, You could lose access to shared amenities like the pool, and in many states, the HOA can sue you for the owed payments. If you continue to neglect HOA dues, your HOA can foreclose on your property in some states.The legal rules for HOAs vary by state.
HOA dues are mandatory and there are real consequences for not paying them.
With that said, HOAs are run by your neighbors. If you fall on hard financial times, contact the HOA proactively to explain. You may be able to work out a payment plan or get relief from a community organization.
Do HOAs affect mortgage eligibility?
If you are buying a home in an HOA-governed neighborhood or building, the bank issuing your mortgage will want to know about it.
In most cases, the monthly HOA dues will be considered when calculating your debt-to-income ratio (DTI), affecting mortgage eligibility.
For instance, if your household earns $5,000 per month and has monthly debt payments of $500, your DTI is about 10%. But the bank would add in the monthly HOA dues that you would owe if you were to purchase the property. If the HOA fee is $250 per month, that bumps your monthly debt payments up to $750, resulting in a DTI of 15%. The higher your DTI is, the less the lender may be willing to loan you.
Additionally, lenders may consider the quality of the HOA, in addition to your creditworthiness. For instance, if the HOA has a track record of being poorly managed, the bank may be less willing to issue a mortgage.
In short, buying in an HOA-governed area can affect mortgage eligibility. However, banks are very familiar with HOAs, and your mortgage officer will be able to walk you through the exact considerations in your situation.
Are HOA dues tax-deductible?
In most cases, HOA dues aren’t tax-deductible.
If you live in the home and pay HOA dues, the fees are not tax-deductible.
However, if you own the home or condo and rent it out, HOA dues may be deductible. This is because the IRS considers HOA fees as a qualifying rental cost. Similarly, portions of your HOA fees may be tax-deductible if you use your home for business purposes.
Rules for HOA taxes can be complex, so it’s best to speak with your accountant for guidance.
Can you lower or negotiate HOA fees?
In most cases, you can’t lower or negotiate HOA fees.
HOA fees are mandatory and set by the HOA board. HOAs use a flat-fee system, which means each homeowner will pay the same amount.
However, in some cases, larger units may pay more. For instance, a 3-bedroom condo may have higher HOA dues than a 1-bedroom condo in the same building.
You generally can’t negotiate or change your HOA fees. However, you can join the HOA board, where you could theoretically influence the HOA’s policies and fees moving forward.
Mastering your money
Before buying in an HOA-governed neighborhood or building, it’s important to know the ins and outs of HOA fees.
While HOAs can be beneficial overall, it’s important to understand the costs upfront.
If you want to learn more about personal finance topics like this one, check out The Score blog.
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