The HOA priority of payments determines how an association applies payments from delinquent owners. This rule matters because owners often owe more than just unpaid dues. They may also owe late fees, attorney fees, collection costs, and fines. Understanding how to properly apply payments in accordance with state law helps the board ensure compliance.
What is the HOA Priority of Payments?
In an HOA, owners are obligated to pay regular dues. These dues fund the community’s operations. The money covers expenses such as landscaping, maintenance, insurance, management fees, and reserve contributions.
Most owners pay their dues on time. Still, delinquent accounts are common in many communities. Owners may fall behind because of financial hardship, job loss, medical expenses, disputes with the board, or simple oversight.
Once an owner becomes delinquent, the balance can quickly grow and get out of hand. Fees can add up, including late fees, attorney fees, interest, fines, and collection costs. Over time, the owner may owe several different types of charges at once.
When the owner finally sends a payment, what should the HOA pay first? This is where the HOA priority of payments rule comes in.
In Texas, the law prevents associations from applying payments however they choose. Instead, the law requires HOAs to follow a specific payment hierarchy. This protects owners from situations in which payments are applied primarily to fines or legal fees, while the actual dues remain unpaid and continue to accrue.
Without this rule, an owner could continue appearing delinquent on regular dues even after making payments. This could increase the risk of additional penalties or foreclosure action.
Order of Priority for HOA Payments in Texas
The priority of payments according to HOA Texas law establishes a mandatory order for applying owner payments. Unless an exception applies, the HOA must follow the order under Section 209.0063 of the Texas Property Code.
1. Delinquent Dues and Assessments
The association must first apply payments to old delinquent dues and assessments. This includes unpaid regular dues from prior months or years.
For example, if an owner owes six months of unpaid dues along with fines and attorney fees, the HOA must first apply incoming payments to those unpaid dues. Texas law prioritizes these amounts because dues fund the community’s ongoing operations.
2. Current Dues and Assessments
After delinquent dues are paid, the association must apply payments to current dues and assessments. This ensures the owner stays in the green moving forward instead of immediately falling behind again.
3. Collection Costs and Certain Attorney Fees
Next, the association may apply payments to reasonable attorney fees and third-party collection costs. This can include collection agency fees, demand letter costs, foreclosure-related collection fees, and attorney fees connected directly to unpaid dues.
Texas law specifically limits this category to collection-related charges tied to dues or foreclosure matters. This helps protect the homeowner.
4. Other Attorney Fees
After collection-related fees are deducted, the association may apply payments to other reasonable attorney fees. These may involve legal services unrelated to foreclosure or collections. For example, the HOA may incur attorney fees for covenant enforcement or other disputes.
5. HOA Fines
The association can apply payments to fines only after it settles dues and attorney fees, not before. This is an important protection for owners. Associations can’t prioritize fines ahead of delinquent dues.
Examples of fines may include parking violations, architectural violations, trash can violations, noise complaints, and other rule enforcement penalties. Fines appear lower on the priority list to prevent associations from using owner payments mainly for penalties while dues remain unpaid.
6. Other Amounts Owed
Finally, the association may apply payments to any remaining charges the owner owes to the HOA. This category can include miscellaneous fees or charges not covered elsewhere in the statute.
Why is the HOA Priority of Payments Important?
The payment priority system protects both the association and the homeowner. For associations, it promotes consistency and supports legal compliance. Boards can avoid accusations of unfair collection practices or selective application of payments.
On the other hand, for owners, the law reduces the risk of payments going mainly toward fines or fees while dues remain outstanding. This is critical because unpaid dues can trigger serious consequences.
If dues remain delinquent, the owner can face additional late fees, liens, and foreclosure. By requiring payments to go toward unpaid dues first, Texas law helps owners address the most serious part of the problem.
Exception for Texas HOA Priority of Payments
Texas law includes an important exception involving payment plans. Under Section 209.0062 of the Texas Property Code, some owners may enter into payment plans with the HOA to repay delinquent balances over time.
If the owner remains in good standing under the payment plan, the normal payment priority rules generally continue to apply. That said, the rules will change if the owner defaults on the payment plan.
What Happens if an Owner Defaults on the Payment Plan?
If the owner breaches the payment plan agreement, the association is not required to follow the standard payment order outlined in Section 209.0063. This gives the association more flexibility in applying incoming payments.
For example, the association may choose to apply payments differently depending on the situation or the terms of the payment plan. Still, Texas law places one important restriction on the HOA.
Even after a payment plan default, the association can’t prioritize fines over other amounts owed. This means the association still can’t take a payment and apply it mainly toward violation fines while leaving dues unpaid.
Best Practices for Texas HOAs
Boards and managers should take several steps to comply with the HOA priority of payment laws. These include:
- Reviewing State Laws and Governing Documents. Boards should ensure their governing documents and collection practices align with Texas law. Keep in mind that state laws take precedence if the governing documents conflict with them.
- Maintaining Clear Collection Policies. The association should adopt written collection policies explaining how it applies payments and how it handles delinquent accounts.
- Keeping Accurate Financial Records. Associations should maintain detailed owner ledgers that show how each payment was applied. With clear records, the board can minimize disputes while simultaneously maintaining transparency.
- Communicating With Owners Early. Many delinquency issues become worse because of poor communication. By communicating early and often, boards can help owners resolve their debts before legal action even becomes necessary.
- Working With Professionals. Associations often work with management companies, accountants, collection agencies, or attorneys to properly manage delinquent accounts. Professional guidance can help reduce legal risks and improve collection practices.
The Board’s Job
In Texas, associations must comply with the law on HOA’s priority of payments. Noncompliance not only increases legal exposure for the association and its board but also chips away at the protection for homeowners. Boards should do whatever they can to help owners stay current on their financial obligations.
Graham Management offers exceptional HOA financial management services to Houston communities. Call us today at (713) 334-8000, request a proposal, or contact us online to learn more!
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