A homeowners association (HOA) loan refers to a sum of money that a homeowners association borrows from a lender, usually a bank or credit union. Like any other loan, an HOA must pay back the borrowed amount in full, plus any interest accrued over the loan’s term. HOA loans serve as a financing option for associations to fund various community projects, repairs, renovations and other expenses.
Reasons Why An HOA May Need a Loan
There are several situations where an HOA loan can come in handy:
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Funding major capital improvement projects – Things like building a new amenity or renovating common areas often require more money than an HOA has readily available. A loan allows them to finance these expensive projects.
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Paying for emergency repairs or maintenance – Sometimes critical repairs like roof replacements or plumbing fixes can’t wait until an HOA builds up enough reserves. A loan lets them fix issues immediately.
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Covering a big one-time cost – Occasional costs like a year’s worth of insurance premiums can be too much for an HOA’s regular operating budget. Financing spreads out these large payments.
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Avoiding a lump sum special assessment – Loans allow associations to spread a cost over time through small assessment increases rather than charge homeowners a one-time large fee.
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Spreading out an upgrade over time – Loans let HOAs pay for amenities in increments rather than upfront, This assigns costs fairly to homeowners benefiting from the upgrade
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Paying today’s prices for a project – By financing a project now, HOAs prevent having to pay potentially higher inflated prices down the road.
The Drawbacks of an HOA Loan
While loans can greatly help associations fund important projects and upgrades, there are some potential downsides to consider:
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Interest costs – Loans come with interest fees that increase the total repayment amount. This extra cost gets passed on to homeowners through higher monthly assessments.
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Risk of financial issues – If many homeowners become delinquent on dues, the HOA could default on the loan. This could trigger penalties and other consequences.
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Mismanagement concerns – Some boards misuse loan funds for unnecessary purposes. Clear communication with homeowners is key to avoid mismanagement accusations.
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Homeowner disagreements – Not all association members may agree a loan is needed. Disagreements could arise over repayment responsibility.
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Mortgage issues – In rare cases, individual owners can have trouble getting mortgages if the community has a high loan-to-value ratio.
Overall, HOA boards should carefully weigh if loan benefits outweigh the costs and risks. Responsible lending practices are key to minimizing downsides.
HOA Loan Requirements and Qualifications
Since HOAs represent shared ownership of a property, lenders have specific requirements they impose to reduce their lending risk:
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Assessment delinquencies – Lenders check if homeowners are behind on dues. High delinquencies increase risk of default.
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Operating cash reserves – Lenders look for adequate reserves to prove the HOA can repay the loan.
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Units occupied by owners – The more owners living onsite, the lower risk for lenders. High investor-occupancy raises concerns.
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Monthly assessment amount – Lenders ensure the HOA can raise assessments reasonably to cover repayment.
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Leadership experience – Boards with expertise in financial planning are seen as lower lending risks.
Meeting an HOA lender’s qualifications requires diligent financial management by the association. Maintaining solid reserves, low delinquencies and preparing leaders are key.
The HOA Loan Application Process
The typical steps an HOA takes to get a loan approved are:
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Review governing documents – The CC&Rs and bylaws must allow the HOA board to borrow money.
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Find a lender – Banks and credit unions familiar with HOAs should be researched. Specialized experience is ideal.
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Submit loan application – The board completes required applications and provides association financial details.
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Provide requested documents – Lenders will ask for governing docs, budgets, financial statements and more.
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Get membership approval – If required, the HOA must hold a vote that passes with majority homeowner approval.
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Undergo underwriting – The lender will verify the HOA’s financial health to approve the loan amount and terms.
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Close on the loan – Finally, loan documents get signed and the HOA receives the borrowed funds.
The approval process can take 4-6 months depending on lender workload, state laws and other factors.
Popular Types of HOA Loans
HOA lenders offer a variety of loan structures associations can choose from:
Term Loans
- Fixed repayment schedule (e.g. 5 years)
- Interest rate stays the same
- Predictable monthly payments
- Best for long-term projects
Lines of Credit
- Revolving credit up to a limit
- Only pay interest on what’s used
- Flexible payments as needed
- Best for short-term needs
Hybrid Credit Lines
- Starts as line of credit then converts to term loan
- Lower rates than standard credit lines
- Repayment deadline motivates discipline
Short-Term Loans
- Faster repayment term (3-10 years)
- Lower total interest fees
- Higher monthly payments
- Quick access to funds
Evaluating loan options that best fit the HOA’s needs and budget is critical before applying.
Tips for a Smooth HOA Loan Process
Here are some tips associations should follow when seeking a loan:
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Check if your state has HOA lending laws – Some states regulate lending to associations.Knowing key requirements helps avoid issues.
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Communicate clearly with homeowners – Transparency about how the loan will be used and repaid builds homeowner trust.
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Only borrow what is absolutely necessary – Don’t take on unnecessary debt. Make conservative lending choices.
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Understand all fees – Look beyond interest rates and know about origination, processing and other fees.
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Build up reserves before applying – Lenders like to see 6-12 months’ worth of reserves built up before lending.
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Shop multiple lenders – Compare all costs and terms across lenders. Look for HOA expertise.
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Review qualifications yearly – Stay ready to qualify for a loan by reviewing financial health regularly.
Following prudent lending practices and guidelines helps make the HOA loan process smooth and minimizes risks or surprises.
Frequently Asked Questions
Can an HOA get a loan?
Most HOAs are legally able to borrow money, provided their governing documents allow it. The CC&Rs and bylaws will specify the rules and restrictions around an association taking out loans.
What are the interest rates on HOA loans?
Interest rates vary by lender and current market rates, similar to other types of loans. Typically HOA loan rates run slightly higher than conventional mortgage rates. Expect rates between 4-7% for an HOA right now.
How long does it take to get an HOA loan?
The entire loan process usually takes 4-6 months from application to funding. Much depends on the lender’s workload, how fast the HOA submits documents and if membership approval is required. State laws on HOA lending also impact timelines.
Does a lender require collateral for an HOA loan?
Lenders can place liens on the shared assets and property of an HOA when lending. Additionally, the right to collect on delinquent assessments or impose special assessments is often used as collateral.
Do HOA members need to vote on loans?
Whether or not an HOA membership vote is required depends on what the CC&Rs state. Many associations do need to hold a vote that passes with a majority before the board can borrow money.
Wrap Up
When unexpected expenses or desired upgrades exceed an HOA’s available funds, securing a loan can be a viable solution. By understanding the costs, processes and options around HOA loans, associations can make smart financial decisions for their communities. With proper planning and communication, loans present opportunities to fund projects that improve properties and add value for homeowners.
Can Every HOA Secure a Loan?
HOAs typically can secure a loan if their governing documents allow it. The governing documents, if created properly, will outline the board’s capacity to obtain a loan in certain circumstances and anything else related to obtaining credit. Many HOAs require a majority vote before the board can apply for a loan.
The authority to secure a loan can sometimes also be found in state laws. For example, Section 7140(I) of the California Corporations Code explains the power of a corporation to borrow money. And, in Indiana, there are specific conditions an HOA must take care of when securing a loan.
Some states don’t have laws regarding this authority. However, a reliable HOA will notify members before it ever takes out a loan. Most boards will also hold space for questions, concerns, and comments at an upcoming board meeting.
What is an HOA Loan?
An HOA loan is a sum of money an association borrows from a bank or creditor with the requirement that they pay back the money, plus interest, per the agreed-upon timeline. The interest is a percentage of the loan added to the principal.
It’s important to note that there are different kinds of HOA loans. Here are the four main ones:
- Line of Credit: This is a flexible loan with a preset borrowing limit. The bank or creditor will only charge interest on the funds borrowed. Because the interest rate is variable, monthly loan payments aren’t fixed. A line of credit typically has periods ranging from a year to five years.
A line of credit is best for HOAs with short-term issues. It can provide a stopgap until the HOA recovers. For example, a pre-established line of credit is incredibly helpful if a natural disaster hits your community, and you need to repair issues quickly.
- Line of Credit with Conversion: This is a loan with two phases. The loan is a line of credit in the first phase. Thus, the HOA pays interest on the funds borrowed.
At the end of 12 months or upon project completion, the loan becomes a standard term HOA loan. The bank or creditor sets the HOA loan rates, and the HOA must start repaying the principal and the interest till the end of the term period.
- Standard Term HOA Loan: The HOA receives the total loan amount from the creditor right away with this loan and then pays it back over the set term period. This loan is best for large repairs or land acquisition. The term period ranges from five to 15 years. The interest rate is fixed, meaning the HOA pays the same amount every month.
- Short-Term HOA Loan: This loan is identical to a standard term loan in most ways but with a shorter-term period. These loans range from three to 10 years.
The monthly loan payments are also higher, but HOAs can pay these back much quicker. There’s also less interest to pay off.