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The Affects of HOA, Mello-Roos, and/or PMI on Your Home

Most homes in the Orange County area include Homeowners Association (HOA), and even some have Mello-Roos. Additionally, for some people to qualify to buy a home in Orange County, they might also need to pay for Private Mortgage Insurance (PMI). These resources come at a cost. Some, or even all of these resources might be beneficial to a prospective home buyer or homeowner; however, such features can negatively affect you too. Let's take a closer look at what each feature provides:

Mello-Roos are special districts, established by local governments to strategically obtain additional public funding to pay for public works and some public services. Utilization of such funds are used exclusively to pay for roads, schools, parks, infrastructure, electricity, police and fire departments, libraries, and water systems. This separate charge is on your property tax bill that is collected when your property tax bill is due. Typically, Mello-Roos are paid off in 20 years. However, State law allows Mello-Roos to extend to a total of 40 years. From a lending standpoint, in addition to your property tax, most lenders will divide your yearly Mello-Roos obligation, if any, into monthly increments to include in your ongoing obligations (debt) so they can determine your Debt-to-Income (DTI) ratio.

Homeowners Association (HOA) is a private organization that maintains and manages services. The elected board of directors have a fiduciary responsibility to uphold the appearance of the community, which may lead to higher property values, provision of recreational amenities, ensuring adequate insurance coverage and reserves, and the stability of the organization. Each HOA community has rules that are outlined in their Declaration of Covenants, Conditions, and Restrictions (CC&Rs). These governing documents "run with the land." Meaning, a homeowner, or a prospective homeowner will have to abide by their HOA CC&Rs to stay in compliance or otherwise they will be fined punitively. The cost of HOA is a monthly ongoing expense that will exist as long as the HOA exists. For this reason, lenders include your HOA monthly dues, if any, as part of your DTI ratio.

Private Mortgage Insurance (PMI) - is an insurance protection for the lender in case if a borrower ends up in foreclosure. PMI is only charged on those borrower's whom have put down less than 20% at the time of their home purchase or whom have less than 20% equity when such borrowers are looking to refinance. Depending on the size of borrower(s) down payment and credit score, the amount the borrower owes on PMI varies. Although one might have obtained 20% or more in equity in later years, some lenders will not allow one to remove the PMI payment; whereas, some other lenders will allow one to remove the PMI payment by having an appraisal done to show that the equity requirement is fulfilled. Usually, lenders that allow one to remove the PMI payment, when there is 20% or more in equity, the borrower will have to wait for a minimum time period. The shortest time period we have found to date is a two-year waiting period. The PMI is yearly premium, that is calculated and collected on a monthly basis. As such, lenders include your PMI payments, if any, as part of your DTI ratio.

These ongoing expense(s) affect the borrower(s) buying power. There is an inverse correlation. As each feature is incrementally increased in cost, the borrower(s) purchase power is proportionally decreased. Moreover, when interest rates go up, a borrower's purchase power is additionally decreased. Lastly, for those who are planning to buy their home cash or currently own their home(s) free and clear, HOA and Mello- Roos will still be present in your home ownership. These on-going expenses tap into your long-term investment and/or your capital rate of return. As a result, we have also completed the analysis on such scenarios so we may be able to help you in your real estate investment decision making too.

For us, at Moaddab Realty, to provide value to our clients and to position them ahead of the curve, we have completed the analyses so we can show our clients how each incremental stage will impact our client's purchase power. We also follow-up with asking our clients, "Up to how much can you afford and are you willing to pay to have such features? Will you be willing to purchase a home in a different city than the one that you prefer because of such cost?" By determining if Mello-Roos is right for you and how much HOA and PMI, if need-be, you can afford, we can then help you determine what city and at what price point you should buy your next home for. As a prospective home buyer or current homeowner, these are some of the topics of discussion that you should have with a professional Realtor® before buying your next home. We would be honored to assist you and represent you in your next home purchase. Please contact us at or (949) 424-7282 so we can further customize your situation into an actionable and obtainable goal.

The images below are some of the scenarios charted to display the proportional decrease in one's purchase power when each feature is incrementally increased in addition to when interest rates rise.

* All information contained on this page was obtained from sources deemed reliable but is subject to errors, omissions, changes or withdrawal without notice. No warranty, express or implied, is made or should be assumed regarding the accuracy, adequacy, completeness, legality, reliability, merchantability or fitness for a particular purpose of any information, in part or whole, contained herein, and should be independently verified. Moreover, Moaddab Realty makes no representations or warranties, express or implied, with respect to future market conditions or any report, study, finding, recommendation or other information provided by Moaddab Realty herein. All material is presented with the understanding that Moaddab Realty shall not be deemed to provide legal, accounting or other similar professional services. Equal Housing Opportunity.

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