Homeowners associations often face large, unexpected expenses such as repairs, renovations or other capital projects In some cases, HOAs need to secure financing to cover these costs. Taking out a loan is a major decision that requires careful planning and communication between the board and homeowners This comprehensive guide covers everything you need to know about HOA loans.
What Is An HOA Loan?
An HOA loan, also called a condominium association loan, is when an HOA borrows money from a lender like a bank. The HOA must repay the loan amount plus any interest by an agreed upon date. HOA loans allow associations to access funds for major expenses.
Types of HOA Loans
There are several types of loans available to HOAs
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Line of credit – Revolving credit with a preset limit. HOA is charged interest only on the amount used Flexible for short-term needs
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Line of credit with conversion – Converts to a standard term loan after 12 months. Line of credit followed by fixed principal and interest payments.
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Standard term loan – Lump sum upfront with fixed repayment terms of 5-15 years. Best for large projects and purchases.
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Short-term loan – Same as standard term but faster 3-10 year repayment. Higher monthly costs but less interest.
Benefits of an HOA Loan
HOA loans offer associations several potential benefits:
- Access capital quickly for major expenses and purchases
- Avoid special assessments or spreading increases over time
- Finance capital projects and improvements upfront
- Pay insurance premiums early for discounted rates
- Complete projects at today’s prices before inflation
Risks of an HOA Loan
While useful in many cases, HOA loans also carry risks:
- Increase in monthly HOA fees to repay loan
- Potential for fraud or mismanagement of funds
- Burden for communities with significant delinquencies
- Legal action if HOA defaults on payments
- Difficulty getting mortgages for homeowners
HOA Authority to Borrow
Before taking out a loan, HOAs must check their governing documents. Most CC&Rs and bylaws specify whether the HOA can borrow money and if membership approval is required. If documents are silent, state law may apply.
Applying for an HOA Loan
The process for an HOA loan typically includes:
- Research lenders like banks and creditors
- Submit application online or in person
- Provide HOA details and financials
- Lender evaluates credit risk
- Loan approval and documentation
- Fund disbursement
The entire process can take around 6 months.
HOA Loan Requirements
Lenders will assess the HOA’s finances including:
- Delinquency rate
- Cash reserves
- Number of units
- Monthly fees
- Board experience
These help determine the risk and terms of the loan.
Tips for HOA Loans
If considering a loan, HOAs should:
- Check authority to borrow in docs
- Evaluate true need and ability to repay
- Create clear repayment plan
- Keep homeowners informed
- Research lender reputations
- Consider impact on future financing
Transparency and proper planning are key to success.
FAQ
Can any HOA get a loan?
HOA authority to borrow must be specified in governing docs or state law.
Does the HOA need member approval?
Check docs to see if membership vote is required for a loan.
Do rates fluctuate?
Yes, interest rates can vary by lender and over time.
What collateral do lenders require?
Instead of property, lenders often use HOA fees or special assessments as collateral.
Conclusion
HOA loans allow associations to fund major expenses but shouldn’t be taken lightly. Boards must evaluate true need, repayment ability, and potential impact before moving forward. Careful planning and transparency are essential to ensure success. With proper diligence, an HOA loan can be an effective tool for funding projects and purchases.
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.
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.