Homeowner Associations, or HOA, are non-profit organizations that provide the upkeep of communities around the country. Approximately one of every five Americans is subject to pay monthly HOA fees and is under strict rules and regulations. Associations charge mandatory fees for upkeep costs, and often times homeowners can also be charged fees for the violations of rules. Borrowers living within such communities are subject to HOA regulations, and corresponding Covenants, Conditions and Restrictions (CC&Rs).
If you fail to pay the monthly fees and/or special assessments appointed by your HOA, in most cases, a lien will be attached to your property. In certain states, this lien is given a “superior lien” status, meaning the home is in great danger of foreclosure. It’s scary to think that at one point, you can be foreclosed on by an organization other than your mortgage lender.
When you purchase a property, any borrower who needs financing will obtain a first mortgage, which is recorded with the county and given first-lien priority. In many cases, borrowers choose to take out a second mortgage loan, which is later recorded and becomes the second lien (i.e. junior lien).
The purpose of lien priority is to determine which debt will be paid off first in the event of a bank repossession, or foreclosure. In today’s economy, especially when a home is underwater (meaning that you owe more on the mortgage(s) than the home is worth) the proceeds from the foreclosure will first go to the priority lien holder, or the first mortgage that was recorded.
The Homeowners Associations may file an assessment lien against a home if the borrower has become delinquent on their monthly dues and/or special assessments. Once the HOA’s Declaration of Covenants, Conditions, and Restrictions (CC&Rs) is recorded, generally the assessment lien will be immediately attached to the home. Typically, the CC&Rs will contain certain language that states the lien is not superior to the first mortgage, or that it’s subordinate to the first lien. In most cases, the HOA lien will be held as a junior lien, which is subject to state laws.
Pursuant to state statute, the Homeowners Association may file a “super lien,” or lien that is given priority over the senior mortgage holder. Very similar to a property tax lien or mechanics lien, if a property is foreclosed on due to unpaid dues the super lien will be paid off first from the proceeds of the sale.
Only Certain States Allow Super Lien Status on Delinquent HOA Assessments
There are only about twenty states across the country that give Homeowners Associations the power to file a super lien in the event of default. In Colorado, if a borrower has fallen behind more than six months on their HOA dues, the Association can file a super lien and will have priority over the first mortgage holder (refer to Colorado Revised Statute § 38-33.3-316). And in Nevada, HOA can obtain super lien status once the borrower has become nine months past due on assessments (citing Nevada Rev. Stat. § 116.3116).
If the HOA decides to initiate foreclosure proceedings to collect on the arrears, not only do they collect the amount owed, it also eliminates any additional liens attached to the property. However, for the mortgage holder to protect their interests in the home, the lender will often pay off the lien amount to preserve their first-lien holder position and stop the foreclosure.