Homeowners associations may sometimes apply for loans to fund capital improvement projects, cover emergency repairs, or refinance other loans. However, obtaining a loan involves a long and complex process that boards aren’t familiar with. What is the HOA loan process like? Here’s what to expect.

HOA Loan Process: How to Apply for an HOA Loan

It might be tempting to jump into the HOA loan process immediately. However, the process begins in the preparation phase. HOAs must prepare for several things, such as choosing the proper loan type and preparing lender requirements. The HOA can only proceed to the next steps after sufficient preparation.

1. Establishing the Need

Why should you take out an HOA loan? It’s important to establish why the HOA needs external funding. Is it to replenish the reserve funds or make up for financial shortfalls? Does the community have plans for a renovation, land acquisition, or capital improvement?

Homeowners associations should thoroughly evaluate the purpose of the loan beforehand. In some cases, HOA boards might find other sources of funding or simply choose to cut down expenses. It’s important to weigh the pros and cons and proceed only when there is a clear need.

2. Choosing the Right HOA Loan Option

Homeowners association loans come in many different forms. There are four main categories of HOA loans:

1. Standard Term Loan. A standard term loan allows HOAs to borrow the entire loan amount upfront. It has a fixed interest rate and a long repayment period, typically 5-15 years. 

2. Short-Term Loan. A short-term loan supplies the entire loan amount upfront and charges a fixed interest. However, repayment periods are shorter and can last between 3 and 10 years. Monthly amortizations are often higher than those of standard-term loans.

3. HOA Line of Credit. A line of credit fixes a borrowing limit for a designated period. HOAs only pay interest on the amount borrowed, but interest rates fluctuate. HOA lines of credit must be renewed each year.

4. HOA Line of Credit with Conversion. A line of credit with conversion begins as a regular line of credit, but by the end of the term, it converts into a term loan. 

Homeowners associations must set their priorities before settling on a loan option. Is the association in dire need of a large sum of money now? It might be worth looking into standard and short-term loans. On the other hand, lines of credit can be handy during emergencies or to cover seasonal expenses.

Remember to consider your financial capacity, too. Some loans are more burdensome than others — at least in the short term. Meanwhile, others offer smaller monthly amortizations but ultimately cost more because of interest.

3. Choosing a Lender

Banks and creditors are a dime a dozen in the HOA loan industry. HOAs should exercise due diligence and look for a lender that meets their needs. They should provide reasonable terms that are fair for both parties. Here are a few questions to ask a prospective creditor:

1. How fast can you provide funds to our vendors? Speed is important, especially if you’re in dire need of a contractor for the project. Prompt payment could make or break a deal with your chosen vendor.

2. How many loans have you provided? Not all lenders have experience working with HOAs. Those that do often offer better rates and have a faster HOA loan process.

3. Do you have references from management companies? Ask for at least three references from management companies to learn more about the creditor’s experience. 

4. Is the loan officer always available to answer our questions? The designated point of contact must be reachable and available. Otherwise, issues might pile up and cause delays in the project.

4. Submitting the Application and Requirements

HOA lenders will have an online or offline application form to fill out. Apart from this, homeowners’ associations must prepare for several requirements. Make sure to keep the following documents ready:

1. Annual budget for the year

2. Financial statements for the current and previous year

3. Latest aging delinquency report

4. Requested loan, project description, and anticipated costs

5. Latest reserve study

Most lenders also ask questions about the association to help them decide. Here are some questions to prepare for:

1. How many units does the HOA have? How many of them are occupied?

2. Do the directors have prior capital planning experience? 

3. How much does the HOA charge in monthly assessments?

4. Will the community raise dues or levy special assessments for repayment?

5. How many delinquencies does the community have? How much is the amount?

6. Does the association have enough liquidity? 

5. Getting Approval and Funding

Homeowners associations can expect the HOA loan process to last a few months. While reviewing the application, the bank may request additional documentation. Once approved, the bank will usually send a notification or contact the HOA. The HOA will need to designate an account for the funding.

What Are the Associated Costs of HOA Loans?

The HOA loan process involves several expenses. However, the fees will vary depending on the lender and type of request. Some fees include attorney’s fees, notary services, document preparation, interest charges, originating costs, and closing fees.

How Long Is the HOA Loan Process?

The HOA loan process takes roughly six months on average. Several factors may speed up or slow down the process, including:

1. Multiple approval steps

2. Special assessment conditions (e.g. the loan may require a special assessment for approval)

3. Membership approval (if required by the governing documents)

4. Lender membership requirements

Do HOAs Need to Involve Homeowners?

The governing documents often dictate whether an HOA loan requires membership approval. Nonetheless, it’s good practice to communicate the board’s intention to secure funding. The community should discuss it in an open forum to avoid future disputes.

How HOA Loan Assistance Can Help

The HOA loan process is long and tedious. It can often take work to distinguish between loan types and the best offer. Lenders also differ in process and terms. We recommend getting professional HOA loan assistance to get the best loans.

With professional assistance, HOAs can experience smooth capital planning, validate all possible paths, and weigh each offer. Let HOALoan.com guide you through each step of the way. Call us today to find out more!