7 Questions to Ask Before Approving Next Year’s Budget

As non-profit corporations, homeowners’ associations (HOAs) are usually required to prepare and execute a budget for each fiscal year. Because an annual budget establishes how the association’s income will be used and calculates expenses based on projections, it must be taken very seriously and prepared with great care.

At Associa, we’ve helped tens of thousands of board members successfully set budgets and maintain financial stability. With help from our financial partner at Farther Intelligent Wealth, Aaron Sheklin, here are seven important questions to ask before approving next year’s budget.

1. Have You Thoroughly Reviewed Financial Statements and Previous-Year Budgets?

It’s critical for boards to review historical financial data instead of relying on estimates. By identifying the community’s spending trends, recurring costs, and missed projections, boards can build a more accurate budget for the year ahead.

“Review your financial statements and previous budgets to understand where, and more importantly why, expenses have escalated,” said Sheklin. “As board members, you have a duty to pass a balanced budget that includes both current realities and future expectations.”

2. Have You Identified Previous Financial Shortfalls and Corrected Budgeting Issues?

To collect enough money to cover expenses, maintain the community, and plan for future repairs, boards must understand where funding previously fell short and correct the issue moving forward. Sheklin recommends reviewing:

Dues collection rate

Taking into account the 100% fallacy, don’t assume that 100% of homeowners will pay their HOA dues. How many of your homeowners have fallen behind on payments, paid late, or haven’t paid their dues at all? Budget based on realistic collection expectations to avoid a dues deficit.    

Vendor agreements

Confirm that you’ve reviewed the escalation clauses within your community’s vendor agreements, including landscaping, pool maintenance, security, and trash collection services. Take into account vendor price increases before finalizing the budget.

LEARN MORE: “10 Vendor Contracts You Need to Review Right Now”

Inflation expectations

Consider how the rising costs of goods and services will affect your community’s expenses. A surge in a vendor’s operating costs, like an increase in building materials, may be passed down to your community.  

Utilities rate projections

Look at past electric, gas, water, and sewer bills. Identify published or announced rate increases and review seasonal usage patterns to forecast next year’s costs.

Reserve study projections

Maintaining a current reserve study is an important tool for projecting capital expenses. Review the community’s reserve study to ensure you’re setting aside enough for future projects and repairs. Underfunded reserves can put your community at risk of having to issue special assessments when major issues arise.

Prior-year inter-fund borrowing or deficit spending

Did your community have to borrow money from one account to cover expenses in another account? Did it spend more money than it collected or budgeted? Make sure you don’t carry these issues into the new year.

3. Does the Budget Clearly Demonstrate the Reasoning Behind a Dues Increase? 

If your association budget includes a dues increase, homeowners will want to know why. For transparency, outline the community’s unavoidable operational overhead, such as utility, vendor, and insurance costs, and the projected rate increases for each. Additionally, highlight the parts of the budget intended for equity preservation and investments. Reserve contributions are essential for a thriving community.  

“Homeowners can better understand fee increases when the board visually illustrates necessary operational costs and can communicate how reserve funding protects their home values,” said Sheklin.

4. Do Your Cost Reductions Include Deferring Maintenance or Discontinuing Routine Maintenance?

All too often, boards look to soften the impact of a dues increase by cutting costs elsewhere. And typically, routine maintenance is where they cut back.

“Trimming essential routine maintenance or deferring maintenance to keep dues politically palatable often ends up being a bad decision for your community,” said Sheklin. “Deferred maintenance often results in more costly capital replacement later.”

Maintaining the community’s infrastructure is crucial. Not only is safety paramount, but regular maintenance and upkeep also ensure the community remains a place people are proud to call home for years to come.

5. Does The Budget Meet Fannie Mae’s New Lending Requirement?

Fannie Mae issued significant changes to its community association lending guidelines.- The most impactful change for condominium residents was an increase in the minimum reserve funding requirement for condominium associations from 10% to 15% of annual budgeted assessment income, effective January 4, 2027.-A change that applies to community associations nationwide, it’s necessary to ensure compliance by the new year.

“Because lenders evaluate the budget active at the time of the buyer's application, upcoming budgets must anticipate this threshold immediately,” said Sheklin.

Watch Our Fannie Mae Lending Requirements Webinar

6. Does the Budget Meet State Legal Requirements and Governing Document Guidelines?

There are many legal factors to consider when drafting an HOA budget. Many state laws regulate condominium and homeowners’ associations and may have parameters around budgets in their statutes. An HOA's bylaws and Covenants, Conditions, and Restrictions (CC&Rs) may also contain policies that affect budget preparation, such as budget meeting notices, special assessment guidelines, and more.

 “It’s important to review your community’s bylaws and CC&Rs before finalizing your budget,” said Sheklin. “Lean on your association attorney or community manager for more information about statutory assessment caps, statutory minimum reserve requirements, budget meeting timelines and procedures, and quorum and voting requirements.”

7. Have You Shared the Budget with Homeowners?

“Failing to share the association’s budget with homeowners before a vote may invalidate the passage of the budget and require another meeting to properly review and approve the budget,” said Sheklin.

Consequences of Failing to Share the Association Budget With Homeowners

• Assessment invalidation and cash freezes. In many jurisdictions, failing to provide the statutory advance notice or failing to distribute the approved budget invalidates the assessment increase. Homeowners can legally withhold the increased portion, forcing the association to operate on the prior year's budget and creating an immediate operating deficit. 

• Disruption of real estate closings. A missing, unapproved, or contested budget halts unit closings and invites mortgage underwriting rejections. 

• Personal fiduciary exposure. Willful failure to follow statutory disclosure timelines can pierce the protections of the Business Judgment Rule, leaving board members personally vulnerable to administrative fines from state regulatory agencies or claims of fiduciary breach. 

Homeowners deserve to know the details of the annual budget. Prepare a presentation that explains how you assembled your budget and outlines your reasoning. Include copies of vendor agreements and past budgets to help strengthen the board’s financial decisions. The more transparent you can be about the budget, the more confident homeowners will be in your leadership. 

Conclusion

Before approving next year’s budget, confirm you’re meeting legal guidelines, are aligned with Fannie Mae’s lending requirements, have reviewed vendor contracts, and inspected historical financial records. Share the budget with homeowners and be transparent about future projections. As a leader of your community, you have a fiduciary duty to manage the association’s finances responsibly. To learn how Associa can help you manage your association’s financials, visit us today.