Many property owners do not realize that state laws enable homeowners associations to foreclose on residential property owners who do not pay their HOA fees. In many instances, your HOA can foreclose on your house even if you have a mortgage on your home. However, the HOA foreclosure does not override the mortgage or enable the HOA to assume the first lien position on your home.
When you finance a home, your lender places a lien on the property by recording the mortgage at the county courthouse. You can take out a second or third mortgage on your home, and each subsequent lender secures the others liens in the same manner. Typically, when you join an HOA, you sign a document called a deed of trust, which enables the HOA to place a lien on your home. Many deed of trust documents include a power of sale clause. If you default on your HOA dues, the HOA can foreclose by filing the power of sale clause at the county courthouse.
Any entity or individual with a valid lien on your property can initiate foreclosure proceedings. The seniority of liens remains the same regardless of which lien holder forecloses. Therefore, if your HOA forecloses, a property sale occurs and sale proceeds are first applied to your first mortgage. If any funds remain, the second lien holder gets paid. If you have two or three home loans, your HOA may foreclose but end up with no proceeds if the sale of your home fails to raise enough money to cover all of your liens.
In most states, when your lender forecloses on your home, you have to go to court and a judge presides over the foreclosure proceedings. You have the opportunity to defend yourself against your lender in order to avert the foreclosure. However, if you signed a deed of trust that includes a power of sale clause, your HOA can conduct a nonjudicial foreclosure. This means your HOA can file for foreclosure without having to get the process approved by a judge. States laws on foreclosure vary, but in Texas an HOA can conduct a deed of trust foreclosure within 27 days of you defaulting on your HOA fees.
If you do not pay your HOA dues, then your HOA may lack the necessary funds to pay for insuring communal areas or performing necessary maintenance. However, if you have a substantial mortgage debt, your HOA may spend more money by filing for foreclosure than it can recoup by foreclosing on your home. Therefore, HOAs are typically more inclined to foreclose on homes that are not financed rather than mortgaged properties. Your HOA may decide to pursue other options such as garnishing your wages or your bank accounts. State laws related to creditor's rights vary, so speak with an attorney to consider your options if you cannot pay your HOA dues.