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What’s the Difference Between an HOA and a PUD?

by | Sep 30, 2022

Even if a property is not part of a Planned Unit Development (PUD), it may have to be defined as such for loan approval. This is because Fannie Mae, the government-sponsored enterprise that purchases mortgage loans, defines PUDs completely differently than local governments do. Why is this?

To understand this conflict, it helps to define what a PUD is. To start with, a Planned Unit Development is planned as a PUD. This may seem like a ridiculous clarification, but is an essential characteristic that sets a PUD apart from neighborhoods that are similar to PUDs, but are not PUDs. A PUD was planned as a PUD, and approved as a PUD by the local government; thus, a PUD has been a PUD since its inception. In this way, a PUD is like a subdivision; both involve an area of many homes developed as part of a plan approved by the local municipality.

Photo by Avi Waxman on Unsplash

Now, what makes a PUD different from a basic subdivision is that all owners who buy into the PUD must be part of a Homeowners Association (HOA). All owners must pay dues to this HOA, and cannot opt out. In a PUD, the individual property owners own their property, and also own communal property through their HOA. A PUD typically has significant communal property ownership, like communally owned roads, parks, spa facilities, gyms, and other amenities. These communal properties are maintained through HOA fees paid by individual owners. That is, the communal property is owned by the HOA, so all property owners have a share in the communal property, since they all have a share in the HOA.

How is this different from condominium ownership, which also has an HOA that owns communal property? The difference is that condo owners do not individually own the land on which their condominium sits. Condo owners typically only own the airspace within their units, and limited, superficial use of their walls and floors. However, in a PUD, each member of the HOA owns their entire house, and the property on which it sits. Thus, members of a PUD own land, not just airspace.

Though members of a PUD own land, PUDs generally have strict rules about the use of this land. Rules might involve restrictive quiet hours, restricted house paint colors, restricted types of plants that may be grown, specific fencing that must be used, and other significant limitations on land use.

A common source of confusion in the real estate industry lies in defining how PUDs are different from neighborhoods that have HOAs, but are not PUDs. Many neighborhoods have Homeowners Associations that require each owner to pay an annual fee, usually for certain limited maintenance of a communal part of the neighborhood. For example, some neighborhoods have a communal well that supplies water to all owners, and each owner must pay dues to the HOA to maintain this well. Other neighborhoods may have a fence and plantings at the entrance to the neighborhood, and charge owners an HOA fee to maintain this entrance.

So, what is the difference between a neighborhood that has an HOA but is not a PUD, and a neighborhood that is a PUD? The source of most of these differences comes back to planning. A PUD is planned as a PUD, and is approved as such by the local government. At the time of approval, the developer of the PUD has created communally owned amenities, restrictions on the use of each property, and many other rules. A neighborhood that simply has an HOA but is not a PUD was not planned or approved as a PUD by the local government. In fact, the neighborhood may have many properties within it that were built decades apart, not as part of the same planned development. However, due to the nature of the neighborhood, it may have been necessary to require all owners to use the same well or to require communal maintenance of some other basic necessity, like a retaining wall to keep out a nearby stream or river. The HOA fees could also be used to clean the neighborhood sidewalks, or perform other aesthetic maintenance. 

These may not seem like particularly important distinctions between PUDs and non-PUD HOAs. However, Fannie Mae, which purchases over 4 million home loans a year, usually defines neighborhoods with HOAs as PUDs, even if they are not. This is because Fannie Mae defines a PUD as a neighborhood in which there is common property and participation in the HOA is mandatory. Thus, almost any neighborhood with common HOA property is a PUD, according to Fannie Mae. This means that thousands of neighborhoods that were not planned, approved or categorized as PUDs must be defined as a PUD in order to be sold to Fannie Mae on the secondary market.

This confusing definition of PUDs can create problems for the loan approval process, as there is often a discrepancy between the way the property is categorized in county records, and the way Fannie Mae categorizes it. Additionally, lenders often treat PUD properties differently, since PUDs usually have higher HOA fees that the borrower must pay on top of their mortgage payment.

An owner in a neighborhood with an HOA that is not a PUD usually pays minimal fees, often only a few hundred dollars a year. A PUD usually has significant, high-maintenance common property (gyms, tennis courts, roads, etc.), so the fees charged to maintain these amenities are much higher.

Another common problem occurs when lenders assume a PUD property is a condominium because it has an HOA. Since lenders are much more strict about lending requirements in condominium projects, mistakenly categorizing a PUD property as a condominium can create significant, time-consuming problems for loan approval.

If a lender has mistakenly categorized a property as a condominium, this mistake must be corrected as early in the approval process as possible. However, if the lender categorizes a non-PUD property as a PUD to fit Fannie Mae’s unique requirements, this might not actually be a mistake, and might help with loan approval.

As is true in real estate and law, seemingly basic definitions are context-dependent. The single most helpful way to define a PUD might be to say “Who’s asking?”

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