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 and how they may benefit an Association and its Homeowners.
Can Your HOA Take Out a Loan?
To determine whether your association can take out an association loan, the association attorney will need to look at the specific circumstances and determine if borrowing is permitted. Language in the declaration, articles of incorporation, or bylaws can restrict or even prohibit loans. Some governing documents require approval of borrowing by a certain percentage of homeowners or even the mortgagees that carry the loans on individual homes. Declarations may also have very detailed language for what a loan may be used for and nothing else.
How Are Loans for Capital Project Financing Typically Structured?
Most Capital Project loans will generally begin as a non-revolving line of credit for the construction period. These lines will typically be for six to twelve months. During the draw period, monthly payments will be interest only on the drawn amount.
Upon expiration or at the end of the construction period, the line of credit will be converted to a fully amortizing fixed rate term loan. The typical maturity will be between five and ten years. Fifteen-year amortizations will be considered for larger projects. If the project is short-term or small in size, the initial disbursement to the customer may represent the full amount of the term loan. Principal and interest payments would typically begin in the month following disbursement.
Why Take Out an HOA Loan or Line of Credit?
HOA loans and lines of credit allow your association to fund a variety of projects and expenses, from common area improvements to maintenance and repairs. Many HOAs, CIDs and PUDs use loans or lines of credit as alternatives to a special assessment for unexpected expenses. You can even take out a loan to pay your annual insurance premiums upfront, if your insurance company offers a discount for paying for the year in advance.
What Are the Advantages of Taking Out an HOA Loan?
It spreads out the cost of common area improvements over time and assigns the cost of those improvements to the people who are benefitting from them the most. It also allows repairs and maintenance to be performed quickly, at today’s prices.
What Are the Disadvantages of Taking Out an HOA Loan?
In some cases, HOAs, CIDs and PUDs may need to increase homeowners’ monthly assessment fees to make the loan payments.
Does an HOA Loan Require Collateral or Other Security?
No. Typically, if the loan went into default, the lender has the right to collect HOA, CID, and PUD assessments directly from the homeowners.
What Type of Information Do You Consider Before Approving a Loan?
To gauge credit risk, a lender will ask for information about:
- Number of delinquencies, and the amount of money involved.
- Liquidity (the amount of cash as a percentage of annual assessments and annual debt service).
- Number of housing units, and how many are owner-occupied.
- Whether monthly assessments will need to increase to pay for the loan.
- HOA officers’ management and capital planning experience.
We understand that community associations face many unexpected challenges and may need funding for projects, emergencies or maintenance. Our HOA loan process features an accelerated turnaround time, providing funds in a timely manner to assist with your community’s needs.
To determine if your community association qualifies for financing, or to get started with a loan request, call us at 800-616-2050 to connect with one of our expert HOA lenders today.