Are HOA Fees Included in Your Mortgage?
Demystify your homeownership costs. Learn the difference between what's in your mortgage payment and separate, ongoing HOA fees.
A mortgage represents a significant financial commitment, serving as a loan obtained from a financial institution to purchase real estate. Homeowners Association (HOA) fees are regular payments made by property owners within a planned community to an established association. A common question for prospective homeowners is whether these HOA fees are integrated into their monthly mortgage payments. Generally, HOA fees are not included as a standard component of a mortgage payment; they are distinct financial obligations.
Components of a Mortgage Payment
A typical monthly mortgage payment is comprised of several distinct elements, commonly referred to by the acronym PITI: Principal, Interest, Property Taxes, and Homeowner’s Insurance. The principal portion of the payment directly reduces the outstanding loan balance. Interest is the cost charged by the lender for borrowing the money, calculated as a percentage of the remaining loan amount.
Property taxes are assessments levied by local government authorities based on the value of the property. These taxes are typically collected by the mortgage lender as part of the monthly payment and held in an escrow account.
Homeowner’s insurance provides financial protection against potential damage to the property from events like fire or natural disasters. Lenders often require homeowner’s insurance and collect these premiums alongside property taxes, placing them into an escrow account.
An escrow account is a dedicated fund managed by the lender, which ensures these periodic, larger expenses are paid on time. This arrangement helps homeowners budget for these costs by spreading them out over monthly installments.
Nature of Homeowners Association Fees
Homeowners Association fees are regular charges collected from property owners residing within communities governed by an HOA. These fees typically cover the maintenance, repair, and improvement of shared spaces and amenities within the community. Common examples of what these fees fund include landscaping for common areas, upkeep of shared facilities like swimming pools or clubhouses, and services such as trash removal or snow plowing.
HOA fees also contribute to reserve funds, set aside for major repairs or replacements of communal infrastructure, such as roof repairs for shared buildings or major renovations. These fees are collected directly by the homeowners association or its designated management company, not by the mortgage lender. This means HOA fees represent a separate and ongoing financial commitment for homeowners in these communities.
Financial Considerations for HOA Properties
When purchasing a property within an HOA-governed community, both the monthly mortgage payment and the HOA fees contribute to the total housing expense. While HOA fees are not part of the mortgage payment, they are a mandatory and recurring cost that must be factored into a homeowner’s budget.
Mortgage lenders consider HOA fees when evaluating a borrower’s financial capacity for loan qualification. Specifically, these fees are included in the calculation of the borrower’s debt-to-income (DTI) ratio. The DTI ratio compares a borrower’s total monthly debt payments, including the proposed mortgage payment and HOA fees, against their gross monthly income.
The inclusion of HOA fees in the DTI calculation can influence the amount of money a borrower is eligible to borrow for a mortgage. A higher DTI ratio, potentially increased by significant HOA fees, may make it more challenging to qualify for a loan or could result in a smaller approved loan amount. Therefore, even though HOA fees are paid separately, lenders account for them in a borrower’s overall financial picture.