Loans for HOAs and Condo Associations: A Complete Guide

Homeowners associations (HOAs) and condominium associations often need to take out loans to finance major projects upgrades and repairs in the community. As the governing body of a shared community, the association may require financing to properly maintain and improve common areas and amenities. Loans allow HOAs and condo associations to spread the costs over time instead of special assessing homeowners all at once.

There are several types of loans available for associations, each with its own terms, requirements, and pros and cons As a board member of an HOA or condo association, it’s important to understand all the options to make the best decision for your community. This comprehensive guide covers everything you need to know about loans for HOAs and condo associations.

Overview of Loans for Associations

An HOA or condo association loan is money borrowed from a bank or other financial institution that must be repaid over time with interest. The loan is taken out directly by the association, not the individual homeowners.

Common uses for association loans include:

• Financing major capital improvement projects like adding a pool, clubhouse, playground etc.

• Funding large, urgent repairs like roof replacements or siding repairs

• Paying a large annual insurance premium upfront if the carrier offers a discount

• Avoiding the need for a lump sum special assessment

HOA and condo association loans allow the cost of major projects and expenses to be spread out over time. Loan payments can be budgeted for through regular HOA fees instead of special assessments.

Types of Loans Available

There are several loan options designed specifically for HOAs and condo associations:

Lines of Credit

A line of credit provides flexible borrowing up to a preset limit. The association only pays interest on the amount actually borrowed. Lines of credit are good for short-term projects and expenses that come up unexpectedly.

Term Loans

With a term loan, the association receives the full loan amount upfront then repays it over a set period of time, usually between 5-15 years. Term loans allow associations to finance large scale projects and upgrades.

Quick Turn Loans

Quick turn loans provide term loan financing but with a faster approval process, usually 5-10 business days. They are designed for more urgent borrowing needs.

Revolving Lines of Credit

A revolving line combines features of both lines of credit and term loans. There is an ongoing credit line with the option to convert all or part of the balance into a fixed term loan.

Conversion Loans

Conversion loans start as a 12-month line of credit then convert into a standard term loan once project funds have been used. This allows flexibility in the early stages of a project.

Loan Amounts, Terms and Interest Rates

Loan amounts, repayment terms, and interest rates can vary considerably depending on the lender, loan type, and the association’s financials. Here are some typical ranges:

• Loan Amount: Anywhere from $25,000 to millions of dollars.

• Term Length: 1-5 years for lines of credit, 5-15 years for term loans.

• Interest Rates: Variable rates from prime + 1% for lines of credit. Fixed rates from 5-8% for term loans.

Lenders will assess the association’s financial health, creditworthiness, and ability to repay the loan from future assessments when determining approval and setting terms.

Pros and Cons of Association Loans

Pros:

• Allow major projects to be completed sooner

• Lock in pricing instead of inflation risk

• Spread repayment over many years to smooth cash flow

• Avoid large special assessments

Cons

• Interest charges increase total cost

• Monthly fees must be raised to cover payments

• Late payments can hurt credit and lead to default

• Loans can be mismanaged if not carefully tracked

As with any major financial decision, the board must weigh all the potential benefits and drawbacks before committing to take out an association loan.

Loan Requirements and Qualification Criteria

HOAs and condo associations must meet certain criteria to qualify for a loan. Typical requirements include:

• Sufficient cash flow to make monthly payments

• Low delinquency rate on HOA fee payments

• Strong reserves and liquidity

• Minimal existing debt obligations

• Authority to borrow per governing docs

• Experienced, financially savvy board members

Lenders will carefully assess the association’s finances including the operating budget, reserves, revenue sources, and existing liabilities. The board should put together a strong loan application package to improve chances of approval.

The Loan Application Process

Here are the typical steps to secure an HOA or condo association loan:

1. Review governing documents – Make sure the HOA has the authority to borrow.

2. Assess financing needs – Determine the purpose, amount, and repayment term needed.

3. Select lenders – Research banks and creditors, get pre-approval.

4. Submit loan application – Provide financials, project details, and board resolution.

5. Lender review – May take 10-30 days including site visits and interviews.

6. Loan approval and closing – Negotiate final terms, sign loan documents.

The entire process can take 2-6 months from start to finish. Having all documents ready and responding promptly to lender requests can help speed up approval.

Tips for Securing a Loan

Here are some tips to improve your association’s chances of getting approved for the best possible loan:

• Maintain sound financial operations and reporting.

• Keep high percentage of homeowners current on HOA fees.

• Communicate early with homeowners on need for loan and impacts to assessments.

• Have a multi-year capital plan identifying improvement projects and costs.

• Seek proposals from multiple credible lenders and compare terms.

• Use an experienced attorney to review the loan agreement before signing.

With proper planning and diligence, an HOA or condo association loan can provide affordable financing for projects that benefit the entire community.

What Happens if the Loan is Not Repaid?

If an association fails to make the required loan payments, here is what may happen:

• Late fees and higher default interest rates are charged.

• The loan goes into default status after 90 days of nonpayment.

• The lender can place a lien on the HOA’s bank accounts and accounts receivable.

• The lender has first right to any assessment income until the loan is repaid.

• The lender may force the sale of common assets or initiate foreclosure proceedings.

• The association’s credit rating suffers making future loans more difficult or expensive.

• Homeowners may have trouble obtaining mortgages if the HOA has a poor credit standing.

To avoid these serious consequences, the board must ensure there is adequate budget, reserves, and homeowner support to repay the loan on time.

Alternatives to Association Loans

Other options besides borrowing include:

Special Assessment – A one-time assessment on all homeowners to cover a specific project cost. Avoid the interest cost of a loan but places a lump-sum burden on owners.

Increase Regular Assessments – Incrementally raise monthly assessments to build up a project fund over time. Takes longer but spreads the cost evenly over each homeowner.

Charge Fees – Implement new fees for use of amenities like gyms, pools, tennis courts to generate additional revenue.

Cut Costs – Reduce operating expenses without sacrificing essentials to free up funds for capital projects.

Depending on the circumstances like cost, urgency, homeowner sentiment, and cash position, these alternatives may be preferable to taking on loan debt.

Key Takeaways on Association Loans

• Loans allow HOAs and condo associations to finance major projects by spreading repayment over many years.

• Interest charges increase total cost but monthly loan payments can be budgeted from regular fees.

• Lines of credit provide flexible short-term financing while term loans offer funding for larger long-term projects.

• Associations must meet financial and operational requirements to qualify for loans.

• Loans must be carefully tracked and managed to ensure on-time repayment and avoid default.

• Alternatives like special assessments or increasing regular fees should also be considered.

With proper diligence and planning, loans can be an affordable financing tool for community associations to maintain and improve their common areas over time.