Dan, what are Planned Unit Developments?
Planned Unit Developments (PUDs) are projects created by restrictive covenants that 1) automatically require each owner to join a homeowners’ association (HOA), which is nonseverable; 2) have mandatory assessments; and 3) have common property and improvements owned and maintained by the HOA.
Condominium projects and cooperative unit projects are not considered PUDs. When you buy a home in a HOA community you agree to abide by the covenants and bylaws which govern the association. Each owner holds title to their lot, including improvements made on their lot. The HOA holds title to the common elements, which are for the use and benefit of the owners.
What should lenders be concerned about when closing loans in a PUD?
Lenders should be concerned about any current violations of the restrictive covenants that created the HOA. These could be unpaid assessments or other violations such as encroachments over setback lines. A T-17 PUD endorsement on the lender’s title policy—which provides protection for these issues—is recommended for all loans made in PUDs and is the common industry practice. A Planned Unit Development Rider to the Deed of Trust should be executed, which has the borrowers promise, among other things, to obey HOA rules and pay assessments.
What if the HOA assessment lien will have priority over lender’s loan?
Usually, the restrictive covenants creating the HOA will have an assessment lien be subordinate to a first lien mortgage loan. On occasion, however, the HOA assessment lien will have priority over a lender’s loan. In this scenario, it is a lender’s decision, in conjunction with their investor, on how to proceed. Texas law (Texas Property Code Section 209.0091) requires that an HOA must provide 60 days’ notice to any lienholder of record before foreclosing so that the lienholder can cure.
This 60-day notice requirement and opportunity to cure generally satisfies many lenders, but a more cautious lender could always collect the payments along with property taxes and insurance premiums for placement in the escrow account established for the loan.
Thanks for the explanation, Dan!
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