Can an HOA Ruin Your Credit?

Residents of many neighborhoods are required to pay fees to homeowners associations that are tasked with maintaining communal areas and enforcing rules pertaining to the maintenance of homes in the community. Failing to pay your HOA fees on time could have a negative effect on your credit score, even if your HOA does not directly report the missed payments to the credit bureaus.

Escrow

In many states, an HOA can place a lien on your home if you fall behind on your association fees. Consequently, lenders often require you to escrow your HOA payments along with your property tax and insurance so that your lender can protect its own lien position by ensuring that these home-related costs are paid on time. If you escrow your HOA payments, you can only fall behind on payments if you fail to make your mortgage payment. If you miss your mortgage payment by more than 30 days, your lender notifies the credit bureaus, and frequent late payments can cause serious damage to your credit score. Therefore, you could see your score drop when you miss an HOA payment even if the HOA does not notify the credit bureaus.

Reporting

A creditor can only make reports directly to the credit bureaus if they have established a reporting relationship, which requires fees at setup. HOAs do not usually set up reporting relationships with credit bureaus. However, many HOAs contract collection agencies to help collect unpaid debts, and collection agencies do have reporting relationships with credit bureaus. If you do not settle the debt before the HOA hires a collection agency, you should expect to see your score suffer when the agency reports the past due debt.

Court Action

If you fail to settle a past due HOA debt, the association could take you to court since laws in many states allow HOAs to garnish your bank account or wages. While credit reports mainly consist of information the credit bureaus receive from your creditors, the credit bureaus also gather information from public records. If the court issues a judgement against you, the credit bureaus could find out about that judgement by checking court records. The judgement would thereafter appear on your credit report and have a damaging impact on your credit score.

Foreclosure

In some states, HOAs can foreclose on your home if you fail to pay your association dues. Foreclosures involving HOAs are often non-judicial, which means the HOA can foreclose without going before a judge. Foreclosures, whether court ordered or non-judicial, appear on your credit report. Negative credit events remain on your credit file for seven years, and it can take many years for your credit score to recover. Therefore, failing to pay your HOA dues could ruin your credit even if the HOA members do not proactively contact the credit bureaus in relation to the debt.