Can An HOA Get A Loan? A Comprehensive Guide

As an HOA board member, I often get asked if our HOA can get a loan. This is an important question that all HOAs should understand. After doing extensive research, I wanted to provide a comprehensive guide on HOA loans.

What Is An HOA Loan?

An HOA loan is when an HOA borrows money, usually from a bank. The HOA then has to pay back the amount borrowed plus interest. HOA loans provide financing to help cover major expenses and projects.

Why Would An HOA Need A Loan?

There are several situations where an HOA loan can be beneficial

Fund major repairs or renovations: If the roof needs replacing or siding needs fixing, a loan can help pay for these big projects upfront.
Cover emergency costs: Sometimes a crisis happens like storm damage that requires immediate funds. A loan can provide money fast.
Pay insurance premiums: Paying yearly insurance premiums all at once can sometimes get a discount. A loan allows this.
Avoid special assessments: Loans spread costs over time instead of special assessments all at once.
Finance new amenities Upgrades like a gym or pool can be paid for over years with a loan

What Are The Types Of HOA Loans?

There are several loan options for HOAs:

Line of credit – A set borrowing limit that the HOA can draw from as needed. Only pay interest on what is used.
Term loan – Borrow a lump sum upfront and pay back over a set period with fixed interest.
Mortgage – Use HOA property as collateral for a traditional mortgage.
Special assessment loan – Borrow against expected special assessment revenue.

Each has pros and cons HOAs should weigh. A financial advisor can help pick the best loan type.

What Is The HOA Loan Process?

Getting an HOA loan isn’t too different from a regular consumer loan. Here are the basic steps:

Review governing docs – Make sure your CC&Rs allow borrowing.
Board approval – Most loans require board approval.
Membership vote – Some HOAs need membership to approve borrowing.
Pick a lender – Banks and credit unions both offer HOA loans,
Submit application – Lender reviews HOA finances.
Get loan terms – Negotiate rates and repayment timeline.
Close loan – Lawyers finalize paperwork.
Receive funds – Money gets wired to HOA account.

It’s wise to consult a lawyer during this process. Expect the approval process to take 1-2 months.

What Are HOA Loan Requirements?

Lenders look at several factors when reviewing an HOA loan application:

HOA budget and finances
Documentation like financial statements
Reserve study showing fund health
Governing document provisions on borrowing
Details on what the loan will finance
Number of units and occupancy rate
Payment and delinquency rate
Board members’ financial experience

Basically lenders want to see a financially healthy HOA with the means to repay. Expect to provide documentation.

Can An HOA Get A Loan Without Collateral?

Lenders often require collateral from the borrower to secure a loan. For HOAs, lenders can place liens on:

HOA bank accounts
Future assessment income
Common areas or amenities
Right to collect special assessments

So HOAs usually pledge future dues or the ability to collect fees as collateral. This gives the lender recourse if the HOA defaults.

How Does An HOA Pay Back A Loan?

To pay back an HOA loan, the HOA needs to budget for repayment installments. This usually involves:

Raising monthly HOA fees
Charging special assessments
Cutting operating expenses
Dipping into reserves

Using higher monthly fees spread over each homeowner is preferred. Special assessments or reserve funds should be a last resort.

What Happens If An HOA Defaults On A Loan?

If an HOA misses loan payments, the lender can take several actions:

Report missed payments to credit agencies
Place a lien on HOA bank accounts
Sue the HOA for the balance
Seek foreclosure on HOA common property

So defaults damage the HOA’s credit and give the lender legal recourse. It’s critical for HOAs to avoid default.

Tips For HOA Loans

Based on my research, here are my tips for HOAs considering a loan:

Exhaust other options first like special assessments
Consult professionals like lawyers and accountants
Communicate with homeowners early and often
Review governing documents and state laws
Pick terms that align with your budget
Have a solid repayment plan
Only borrow what is absolutely needed
Maintain transparency in how funds are used

Following these tips will lead to a smoother loan process and better outcome.

The Bottom Line

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.

How do You Apply for an HOA Loan?

Most banks and creditors treat HOA loans like business loans, which means they have a principal plus interest structure. HOAs must take loans out under the association’s name and 15 years is typically the maximum term period for repayment.

Nowadays, you can apply for HOA loans in-person or online. The bank or creditor will usually ask a group of questions to assess credit risk and see if you meet HOA loan requirements. Expect questions like these:

How many housing units are in your HOA?
How many units are occupied by owners?
How much do you charge for monthly assessments?
What experience does your board have with capital planning?
Will you raise monthly assessments to pay for this loan?
How many delinquencies do you have?

The loan process typically takes about six months from application to finalization. The process involves multiple steps and multiple parties are involved, so the timing can vary.

How can the HOA affect your mortgage loan?

FAQ

What is the HOA loan?

Homeowners’ association (HOA) boards need to be smart with money to keep their community running smoothly. However, there are instances when HOAs don’t have enough capital in their accounts for large-scale projects or unexpected expenses. In this case, board members can take out HOA loans to fund these projects.

What is the meaning of HOA in mortgage?

A homeowners association (HOA) is an organization in a subdivision, planned community, or condominium building that makes and enforces rules for the properties and residents. Those who purchase property within an HOA’s jurisdiction automatically become members and are required to pay dues, which are known as HOA fees.

What does “HOA” stand for in banking?

If you’re a Homeowners Association (HOA), Common Interest Development (CID) or Planned Unit Development (PUD) officer, it’s important to understand how HOA loans work before you apply. We’ve answered some frequently asked questions to give you a high-level overview of HOA loans.

Do I need a loan for my Hoa?

A loan should not always be necessary, but it can help your association in times of financial strain. Preferably, your HOA should have sufficient funds in both the operating account and reserve account. This is so you have enough money to cover all expenses, including maintenance, repairs, and capital improvements.

Should I take out an HOA loan or line of credit?

If your association requires repairs, maintenance upgrades, or common area improvements, you may want to consider taking out an HOA loan or line of credit. Loans help fund a variety of unexpected projects when the individual assessment cannot cover the expenses.

Are Hoa loans a good idea?

HOA loans can be a great solution for managing finances, but there are several pros and cons to consider before taking out a loan. On the plus side, HOA loans enable associations to spread the cost of capital improvements over a longer period of time rather than requiring an upfront payment.

Should a community association take out a Hoa loan?

Community associations typically have a reserve fund that is used to cover unexpected expenses and large capital projects. By taking out an HOA loan, the association can receive additional funds which can be used to strengthen the reserve fund, ensuring that there are sufficient funds available for future needs.