Homeowners associations have a choice between several different HOA loan options. Each type will have different terms, loan limits, and interest rates. Let’s compare each alternative to find your community’s best choice.
HOA Loan Types
Banks and creditors offer many different types of HOA loans. Regardless of how unique a loan may be, most HOA loan options can be categorized into four different types.
1. Standard Term Loan
Standard-term loans, or long-term loans, are one of the most common HOA loan options. It’s often used for long-term projects like significant community improvements, extensive repairs, and land acquisition.
Standard-term loans have several benefits, the first of which is a lower monthly amortization. Because long-term loans spread the payment over a more extended period, HOAs can repay the amount in smaller installments. In addition, standard-term loans allow HOAs to borrow much more than other types of HOA loans.
However, standard term loans do have downsides. Most standard loans have higher interest rates and total interest costs. They also have longer maturity schedules, which puts the HOA in debt for an extended period. Terms last between 5 to 20 years, depending on the agreement.
2. Short-Term Loan
Short-term loans, sometimes called medium-term loans, are similar to standard-term loans because of a fixed interest rate. Moreover, banks provide all the money upfront, allowing HOAs to use it immediately to fund projects.
As the name suggests, short-term loans have shorter terms than standard-term options. They can last anywhere between 3 and 10 years. HOAs often use short-term loans for moderate structural maintenance or sudden repairs. Sometimes, they may use this type of loan to repay a different debt or replenish the reserves.
There is a trade-off for the shorter repayment period, though. Monthly amortizations tend to be higher, making it a heavier burden for financially challenged associations. The total interest is much lower than long-term loans because you don’t pay interest as long.
3. HOA Line of Credit
An HOA line of credit, or a standalone line of credit, acts like a credit card for homeowners associations. Lenders will provide a maximum borrowing limit for a set period, usually 1-5 years. HOAs only need to pay back the amount borrowed.
Paying interest only on the borrowed amount sounds appealing, but lines of credit can be difficult for several reasons. For one, interest rates are usually subject to monthly changes. Even if an HOA borrows the same amount each month, it might have to pay back more because of the interest.
HOAs also need to renew the line of credit annually. Unfortunately, the bank decides whether or not to extend the agreement. If they decide not to renew, the HOA might be forced to find another large source of funds quickly to continue the project.
An HOA line of credit can be handy in a pinch. However, if the association has a guaranteed source of income, it might be easier to repay the amount borrowed. The HOA could end up placing a large financial burden on the homeowners.
4. HOA Line of Credit With Conversion
An HOA line of credit with conversion acts like a typical line of credit for the first year or so. Afterward, the loan is converted to a term loan with a fixed principal and interest rate. Associations utilize this type of credit if they need large funds for the first phase of a renovation or construction project. Afterward, the term loan can be used to pay for project completion.
This type of loan is attractive because HOAs can initially save interest costs by only paying them on the funds borrowed. However, HOA boards should be cautious when converting the loan. They need to understand the calculations and factors behind fixing the interest on the standard loan.
For example, some lenders might fix the interest rate only upon conversion. Since the association has already agreed to the loan, they might have no choice but to accept the interest rate the bank decides for the term loan.
HOA Loan Options: Which Is Right for Your Community?
The right loan for a homeowners association will depend on several factors. Here are a few considerations you should consider before signing an agreement.
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Loan Amount. How much does your association need immediately? Lines of credit typically have smaller borrowing limits. Meanwhile, short and long-term loans have larger maximum loan amounts.
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Purpose of Loan. Why does the HOA need the loan? Is it for a long-term capital improvement project or a modest renovation? Does the community need the funds to make immediate repairs after a natural disaster?
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Income Stream. Homeowners associations are non-profit organizations. Apart from HOA fees, they sometimes have sufficient revenue to repay large monthly loans. The HOA’s income must be enough to cover the cost of monthly amortizations.
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Liquidity. Does the HOA have enough liquid assets to repay short-term amortizations or lines of credit loans? Liquidity may affect how much you can immediately pay back and can restrict the type of loan you can apply for.
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Eligibility. Homeowners associations may qualify for some HOA loan options but not others. The requirements and qualifications limit your options for securing a loan.
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Repayment Period. Is the community comfortable repaying a loan for a shorter or longer period?
Get Expert Advice
Homeowners associations can use different HOA loan options to finance their projects. However, choosing a loan type is not as simple as it sounds. There are many other factors to consider, such as compliance with state law and the governing documents. Lenders also offer different loan structures with varying interest rates.
One wrong move could cost the HOA hundreds of thousands of dollars. Worse yet, poor planning might force the community to redirect HOA fees to debt repayment instead of community maintenance. It’s important to exercise due diligence before taking out a loan.
Do you need assistance with securing a loan? HOALoan.com can guide you through the entire process so you can find the best lender, loan type, and interest rate. Reach out to us today!