If you live in a condominium, townhouse, or planned community, chances are you pay homeowners association (HOA) fees each month. This money goes towards maintaining and improving common areas and amenities
But what happens when your HOA needs a large influx of cash for a major project or repair? Taking out a loan through the HOA is one way to raise the necessary funds.
In this comprehensive guide, we’ll explain everything you need to know about HOA loans, including:
- What is an HOA loan?
- Why do HOAs need loans?
- What are the different types of HOA loans?
- How does an HOA qualify and apply for a loan?
- What are the repayment terms?
- What are the pros and cons of HOA loans?
- Tips for HOAs considering a loan
Whether you’re an HOA board member or a homeowner, read on to learn the ins and outs of HOA financing.
What is an HOA Loan?
An HOA loan is a sum of money borrowed by a homeowners association from a bank or other financial institution. The HOA must repay the loan amount plus interest over a set period of time.
HOA loans provide necessary funding for major capital projects and improvements that assessment fees alone cannot cover. Like any loan, an HOA loan allows the borrower to receive a lump sum of cash upfront and pay it back slowly in installments.
HOAs may need loans for big expenses like:
- Replacing roofs
- Repaving roads and parking lots
- Installing new recreation facilities
- Renovating amenity spaces
- Completing major landscaping projects
- Funding large pending lawsuits or settlements
- Replenishing dangerously low reserve funds
HOA loans should be viewed as investments that enhance property values and quality of living. The loan spreads repayment over time so current and future homeowners share responsibility.
Why Do HOAs Need to Take Out Loans?
There are several scenarios where securing an HOA loan makes practical sense:
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Unexpected repairs or emergencies – If a pipe bursts, retaining wall collapses, or natural disaster strikes, loans provide quick access to funds needed for rapid response.
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Major capital projects – Funding multi-million dollar renovations and upgrades requires more capital than an HOA has available.
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Smoothing out special assessments – Loans spread costs over time rather than demanding a huge lump sum special assessment from owners.
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Taking advantage of investment opportunities – If buying available land next door, a loan helps seize the opportunity.
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Account for rising inflation – Construction costs go up over time. A loan lets you complete projects now before they become even more expensive.
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Limited options to raise funds – HOAs have finite ways to raise money. Loans supplement assessment fees.
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Upgrade amenities to boost home values – Improved amenities like a pool, trails, playground justify higher home prices.
Without financing, communities deteriorate as repairs and upgrades are perpetually deferred. Loans prevent this downward spiral.
Types of HOA Loans and Lines of Credit
HOAs have several loan structures to choose from, each with pros and cons. Common options include:
Installment Loan
- Fixed interest rate
- Fixed monthly payment
- Term length anywhere from 3-20 years
- Must qualify based on HOA’s financials
Line of Credit
- Revolving credit line with set limit
- Only pay interest on what you use
- Flexibility in how you draw/repay funds
- Variable interest rate
Convertible Line of Credit
- Starts as line of credit for construction period
- Converts to standard installment loan once project completes
Letter of Credit
- HOA’s promise to pay back borrowed amount
- Bank pays contractor directly as work is completed
- HOA reimburses bank in installments
Blanket Loan
- Credit line secured by property as collateral
- Typically used for emergency repairs and maintenance
The best loan type depends on your HOA’s specific situation and budgetary needs. A lender can help you choose the optimal structure.
HOA Loan Qualification and Application Process
Before issuing a loan, the lender will want to thoroughly review your HOA’s financial health to assess repayment risk. Be prepared to provide documents like:
- Governing documents
- Financial statements and budgets
- Reserve study
- Information on total units, occupancy rates
- Past tax returns
- Board meeting minutes
- Current assessment delinquency rates
- Insurance policies
The lender will analyze factors like:
- Cash flow
- Debt levels
- Repayment sources
- Credit and operational history
- Strength of governing documents
- Adequacy of reserves
- Overall financial planning
prepare a loan application package containing this information to send to banks you’re seeking financing from. The application process typically takes several months. Allow ample time for loan evaluation, processing, approval, documentation, and fund disbursement.
HOA Loan Repayment Terms and Sources
HOA loans must be repaid in full with interest by the maturity date. Typical repayment terms range from 3-20 years. The HOA makes fixed installment payments including both principal and interest.
You’ll need to factor the ongoing loan payments into your HOA’s annual budget and cash flow. Most HOAs raise monthly assessments slightly to cover the extra expense. Special assessments specifically for the project may also help repay the loan.
Having homeowners cover the loan through higher assessments spreads the financial burden across all benefited owners. Compared to special assessments targeting just current owners, the incremental monthly increase is usually more manageable.
The Pros and Cons of HOA Loans
Benefits of HOA Loans
- Access funds for major capital improvements and repairs
- Avoid or minimize need for special assessments
- Take on vital projects sooner than reserves allow
- Lock in pricing by completing upgrades now
- Spread large expenses over multiple years
- Help build and preserve property values
- Keep the community competitive by enhancing amenities
Potential Downsides of Loans
- Monthly assessments may need to increase
- Paying interest costs more over the long-run
- Projects should have clear return on investment
- Loans can occasionally hinder unit sales if new buyers don’t qualify for mortgages
-Some owners may dislike increased fees and debt
Overall, the benefits tend to outweigh the negatives when well-managed HOAs use loans judiciously to fund prudent projects. But loans shouldn’t be taken out frivolously.
Tips for HOAs Considering a Loan
- Thoroughly research lenders and loan options to find the best fit
- Compile financial statements, reserve study, governing docs, and all required paperwork
- Check your state laws and governing docs to ensure you can legally take out a loan
- Allow plenty of time for loan processing – at least 6 months
- Communicate with homeowners throughout the process to boost support
- Make sure the project has an acceptable ROI and enhances property values
- Only borrow what you can realistically budget to repay
- Have a solid plan for repaying the loan before applying
With proper planning and research, an HOA loan can provide your association the key funding needed to keep your community in top shape.
Frequently Asked Questions about HOA Loans
How much can an HOA borrow?
Loan amounts vary greatly but most fall in the $100k-$5M range. Loan size depends on factors like HOA size, budget, assets, income, and the specific project.
What is a typical interest rate on an HOA loan?
HOA loan rates also vary but generally range from 5-10% fixed interest for a 3-20 year term. Rates depend on financial strength, credit history, loan size, repayment term, and current economic conditions.
Are HOA loans risky?
HOA loans carry a modest default risk if the HOA cannot fulfill its repayment obligations. But for HOAs in sound financial health, loans used prudently are usually very safe investments.
What happens if the HOA defaults on the loan?
If an HOA defaults, the lender can seize HOA assets, raise monthly assessments, or put a lien on the property to recoup losses. Defaulting hurts homeowners and should be avoided at all costs.
Should I support my HOA getting a loan?
If your HOA loan funds necessary capital improvements, enhances amenities, and has a reasonable repayment plan, it deserves homeowners’ support. Communicate concerns to the HOA board to address before applying for the loan.
The Bottom Line
When an HOA needs a capital infusion for major upgrades and repairs, a properly structured loan provides an effective financing solution. Although loans do incur interest costs, the overall benefits often make borrowing prudent.
HOA loans allow communities to take on vital projects that assessment fees alone cannot finance. But loans should be used judiciously and only when repayment is realistic. With sound planning and clear communication, loans can greatly enhance your HOA.
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.
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.