HOA Liens and Foreclosures: An Overview

When you buy a home that's part of a planned community with covenants, you'll most likely pay fees and assessments ("assessments") to a homeowners' association (HOA). Based on the Covenants, Conditions, and Restrictions (CC&Rs) and state law, an HOA can usually place liens on the properties in its neighborhood if homeowners become delinquent in paying the assessments.

An HOA lien usually attaches to the property, typically when the assessments are due, the CC&Rs were recorded, or when the HOA records a notice of lien in the land records. In some cases, the HOA will record its lien in the county records to provide public notice that the lien exists, even if state law doesn't require recordation.

Once the HOA has a lien, it might decide to foreclose it to force the sale of the home to a new owner.

How Homeowners' Associations (HOAs) Work

An "HOA" is a legal entity that manages and maintains a particular neighborhood. Its members usually consist of homeowners in the community. The original developer of the community typically creates the HOA. The community rules are ordinarily outlined in the CC&Rs.

The main functions of the HOA are to:

• collect assessments and dues, and
• enforce the rules of the community.

HOA communities may consist of single-family homes, townhomes, or condominiums, though separate state laws might govern homeowners' associations in subdivision communities and condominium owners' associations (COAs).

How HOA Fees Work

Homeowners who live in the community are often required to pay a periodic fee to the HOA to maintain the community. The HOA collects these fees (or "dues") to pay for things like landscaping, security, snow removal, and repairs and maintenance for shared facilities, like pools, tennis courts, workout rooms, and clubhouses. The fees also pay the salaries of HOA employees.

To determine the amount each homeowner must pay, the HOA usually develops a budget and divides the total expenses by the number of homes in the community. Homeowners generally must pay their share monthly or on another fixed schedule throughout the year.

What Are HOA Special Assessments?

At times, the HOA might levy special assessments for one-time expenses if the HOA's reserve funds won't cover the cost of a major repair or improvement. For example, an HOA might levy a special assessment to pay for a new roof for the community clubhouse or pay for a new road.

How Do HOA Liens Work?

Again, once a homeowner becomes delinquent on the assessments, an HOA lien will usually automatically attach to that homeowner's property. The lien typically attaches as of the date the assessments became due. However, it could attach as of the date the CC&Rs were recorded or when the HOA recorded a notice of lien in the land records. In some cases, an HOA will record a lien with the county recorder to provide public notice that the lien exists, regardless of whether state law requires recording.

Depending on the terms in the CC&Rs, the homeowner might be liable for charges like:

• the unpaid assessments
• late charges
• reasonable costs of collecting (for example, attorneys' fees)
• fines (in some cases), and
• interest.

Not only will an assessments lien cloud the title to the property, which hinders the homeowner's ability to sell or refinance the home, but the property can also be foreclosed. In an HOA foreclosure, as in a typical home loan foreclosure, the property is sold to satisfy the debt.

How Are HOA Liens Foreclosed?

If an HOA has a lien on a homeowner's property, it may foreclose even if the home has a mortgage, as permitted by the CC&Rs and state law. The HOA can foreclose either through a judicial or nonjudicial foreclosure, depending on state law and the CC&Rs.

• Judicial foreclosures. To judicially foreclose an assessments lien, the HOA must file a lawsuit against the homeowner and obtain a judgment from the court granting permission to sell the home to satisfy the HOA's lien.
• Nonjudicial foreclosures. To nonjudicially foreclose, the HOA doesn't have to go through state court. Instead, it follows specific procedures that state law and the CC&Rs require.

What Happens to a Mortgage if an HOA Forecloses?

Often, an HOA's CC&Rs or state laws contain a provision that says an HOA lien has priority over all liens and encumbrances recorded after the recordation of the declaration of CC&Rs except a first mortgage or deed of trust that was recorded before the date the assessments became delinquent.

In this scenario, the first mortgage lien remains on the property following an HOA foreclosure. HOA super liens, on the other hand, are a different story.

The Borrower Remains Liable for the Debt

Because the HOA didn't sign the promissory note (the borrower did), the HOA isn't obligated to pay the first mortgage holder if it gets ownership of the property as a result of the foreclosure, even though the first mortgage lien remains on the property. So, the personal obligation to pay the debt stays with the borrower.

An HOA's Options After Foreclosing

Assuming that the borrower stops making payments to the first mortgage holder if the HOA forecloses (or maybe the borrower is already in default on mortgage payments), the HOA can then choose to:

• pay the first mortgage holder to prevent it from foreclosing, although it has no obligation to do so and probably won't, or
• let the first mortgage holder foreclose.

HOAs sometimes let a mortgage holder foreclose so that the home will turn over to a new owner at the foreclosure sale, either to the first mortgage holder or a third-party purchaser, who will then pay the assessments.

In the meantime, the HOA might rent out the home on a short-term basis until the first mortgage holder's foreclosure is complete. But it might be guilty of rent skimming if it doesn't pass the rent along to the senior mortgage holder.

Second Mortgage Liens in an HOA Foreclosure

Following an HOA foreclosure, all liens that are junior to the HOA's lien, such as a second mortgage, are extinguished, and the liens are removed from the property title.

While the collateral for the debt has been eliminated, the borrower's obligation to pay remains in place because the borrower signed a promissory note. The second mortgage holder might then sue the borrower to collect the debt.

State Law Often Puts Limitations on HOA Foreclosures

State laws often place particular due process requirements on HOAs regarding how and when they can foreclose an assessments lien.

For example, in California, the delinquent assessments must equal or exceed $1,800 or the delinquency must be at least 12 months old before the HOA can initiate foreclosure proceedings.(Cal. Civ. Code § 5720) (2024).) To learn about the laws governing HOA foreclosures in your state, review your state's statutes. Or talk to a local real estate or foreclosure attorney.

While states often restrict the circumstances under which an HOA can foreclose, the bottom line is that, in most cases, an HOA can eventually foreclose if you default on assessments in much the same way a lender would foreclose a defaulted mortgage.

Getting Your Home Back After an HOA Foreclosure

If your state provides a right of redemption after the foreclosure sale, you can repurchase the property. Redemption laws vary widely from state to state.

In California, if the HOA forecloses using a nonjudicial foreclosure process, you get a 90-day right of redemption (Cal. Civ. Code § 5715 (2024).) During the redemption period, you may get the property back after the foreclosure by paying the amount of the lien, plus costs, fees, and other allowable charges. California law also requires you to reimburse the purchaser for any repairs made to the property.

In Texas, the redemption period is 180 days from the date an HOA mails written notice of the sale to the homeowner. (Tex. Prop. Code § 209.011 (2024).) However, the laws for condominium associations in Texas are different.

Depending on your state's laws, the redemption time frame might be longer or shorter. Even if your state law doesn't provide a specific right of redemption after an HOA foreclosure, your state might have another law allowing a redemption period following the foreclosure of a mortgage lien, which could also apply to an HOA foreclosure.

But some states don't provide a right of redemption at all.

How Much Will an HOA Foreclosure Hurt My Credit Score?

HOAs sometimes don't report late or missed payments to the credit reporting bureaus. So, your credit scores might not take a hit if you don't pay your HOA.

But your credit scores will likely drop if you lose the property to an HOA's foreclosure. Exactly how far your scores will fall depends largely on how good your scores were before the foreclosure.

Your Late HOA Payments Might Not Hurt Your Credit Scores, But a Foreclosure Probably Will

Because a company has to become a member of the bureaus to report delinquencies, many HOAs, which are often small organizations, don't bother. The cost and certain reporting requirements just aren't worth it to them.

So, your HOA might not report your delinquent payments to the credit bureaus. But if the HOA sends the debt to a collection agency to try to collect from you, the debt collector might report it.

And if an HOA forecloses, the action will probably show up in your credit history even if the HOA doesn't report it. Here's why: Again, HOA foreclosures are judicial or nonjudicial. Judicial foreclosures go through the courts. Court filings are part of the public record. If the credit bureaus find out about an HOA foreclosure from the public record, which they usually do, the bureaus will add this information to your credit report.

While nonjudicial foreclosures typically happen without any court oversight, the process often involves recording a notice in the land records. Like court filings, land records are available to the public. So, the credit bureaus can easily find this information and include it in your credit reports.

How Much Your Credit Scores Might Drop After an HOA Forecloses

A foreclosure will likely reduce your FICO score by at least 100 points. The number of points the score will drop varies from person to person.

The drop would be more severe if you had a very high credit score before the foreclosure. But if your credit score is already pretty low, the foreclosure will have less impact. Missed HOA payments can also lower your score if the HOA reports them to the credit reporting bureaus.

According to FICO, if you had a score of 680 before going through a foreclosure, your score will probably be between 575 and 595 after the foreclosure (a drop of 85-105 points). But if your score was 780 before the foreclosure, your score will likely fall to somewhere between 620 and 640 (a decline of 140-160 points).

Low Credit Scores Can Affect Your Ability to Get a New Loan or Credit

When you apply for a new loan or credit, one of the first things the potential creditor will consider is your credit score. A foreclosure can remain on your credit report for seven years. But if you stay current on your other debts, your FICO score can start to recover in as few as two years.

Until your credit score begins to improve, a prospective creditor might turn you down if you apply for a new loan or credit, or the creditor might make you pay a high interest rate or fees.

Talk to an Attorney

If you're behind in your HOA dues, consider contacting the HOA to arrange a payment agreement or another workout option before it initiates a foreclosure against you. Consider contacting a lawyer if you need help negotiating with your HOA or if the HOA has already started a foreclosure.