HOA fees: what they cover, how they change and how lenders count them

What dues pay for

An association's budget usually covers some mix of:

• Insurance. The Colorado Division of Insurance describes the master policy as the association's main policy, covering common areas and shared structures.
• Maintenance and repairs. Landscaping, snow removal, cleaning, elevators, pools and the like.
• Management and administration. A management company, accounting, legal fees.
• Utilities. Sometimes water, sewer, trash or common-area electricity.
• Reserves. Savings for large future repairs, such as roofs, paving, siding and mechanical systems.

What is included varies widely. A $400 fee that covers water, trash, exterior maintenance and insurance on the building may cost less overall than a $150 fee that covers almost nothing. Compare what the fee replaces in your own budget.

Reserves are the key line

Reserves are what keep dues stable. If an association saves too little, it has to raise dues sharply or charge special assessments when a big repair comes due.

Fannie Mae's Selling Guide gives a useful benchmark. In its full review of a condo project, the lender must confirm the association's budget is adequate and funds replacement reserves for capital expenditures and deferred maintenance of at least 10 percent of the budget. The lender divides the annual reserve allocation by budgeted assessment income. Alternatively, it can rely on an acceptable reserve study showing adequate funded reserves.

That 10 percent is a lending minimum, not a target. A reserve study, which inventories major components and their expected costs and lifespans, is the better guide to whether reserves are enough.

How lenders count dues

The CFPB defines debt-to-income as monthly debt payments divided by gross monthly income. Lenders include association dues in the housing payment. So dues reduce how much you can borrow, dollar for dollar against the payment.

Signs a fee may rise

• Reserve contributions below 10 percent of the budget, or no reserve study.
• Major components near the end of their life with no funding plan in the minutes.
• Rising insurance costs, or a master policy with a high deductible.
• Many owners behind on dues. Fannie Mae's review looks at how many units are 60 days or more past due.
• Pending litigation.

When dues are not a condo issue

Many single-family subdivisions have associations with lower dues, often covering common areas, entrances and amenities. The same questions apply: what does it cover, what is in reserves and how often have dues gone up?

Comparing two associations

When you are choosing between two homes, put the dues side by side with what they cover. A higher fee that includes water, trash, exterior maintenance and the master insurance policy can cost less overall than a lower fee that leaves those to you. Then compare the reserve contribution as a share of each budget, the history of increases over the last few years and any assessments in the minutes.

The bottom line

Treat HOA dues as part of the price. Read the budget, check the reserve line against Fannie Mae's 10 percent benchmark and a reserve study, and look at the minutes for increases. A slightly higher fee in a well-funded association is often cheaper over time than a low fee in an underfunded one.