Lending institutions typically have HOA loan requirements that associations must meet before gaining approval. Understanding these different requirements will give board members a head start on the application process.

What are HOA Loan Requirements?

Homeowners association loans work much the same way as business loans. HOAs must meet specific requirements and submit certain documents. Banks and creditors review these requirements before deciding whether to approve or deny the loan application.

Lending institutions are not made equal. What one bank may ask for, another bank might not. As such, the requirements can still change depending on the bank or creditor.

That said, here are some of the most common requirements for a HOA loan.

1. Project Description

Before issuing a loan, a bank will likely ask the HOA what the loan will be used for. This includes a description of the project, estimated costs, contractor details, and license information.

2. Association Documents

Many lending institutions ask HOAs to produce a copy of their governing documents. These include the Articles of Incorporation, the CC&Rs, and the bylaws. Banks may also ask for the board roster, copies of board meeting minutes for the past six months, and a formal copy of the association’s collection policy.

3. Low Delinquency Rates

Most banks will ask HOAs for information about their delinquency rates. Typically, banks approve loans for HOAs with less than 5% delinquencies, some of which have a ceiling of 10%. Banks may also request a copy of the most recent delinquency report.

4. High Liquidity

With liquidity, banks consider the HOA’s cash amount against the annual dues and debt service. Typically, banks have a minimum requirement of 20% liquidity of the association’s annual dues. An HOA with more than 50% liquidity and at least a year of debt service is considered to have strong credit.

5. Size

Homeowners associations will likely need to provide details about the community size (number of homes or units). Banks tend to favor HOAs with more units or homes, offering a more diversified cash flow stream.

6. Planned Assessment Increases

Banks will ask HOAs if they plan to raise dues and assessments. An increase in dues can trigger higher delinquency rates. Associations should limit increases to less than 25%. If an HOA wishes to make a larger increase, it is best to do so before the loan application.

7. Repayment Strategies

If an HOA wants to take out a loan, banks understandably want to know how the HOA intends to repay the loan. What plans exist to earn enough money to cover the principal and interest? This could come as a dues increase or a special assessment.

8. Financial Documents

Financial reports are one of the most exhaustive yet important HOA loan qualifications. Lending institutions want to know an association’s financial state before approving a loan.

Here are some of the financial reports and statements that a bank might request:

1. Annual budget for the current fiscal year

2. Year-to-date financial statements (balance sheets, income statements, cash flow statements, general ledgers, etc.)

3. Accounts receivable aging of at least three months

4. Year-end financial statements for the past three years

5. Tax returns for the past three years

6. The most recent reserve study

7. Current bank account statements

8. Deliqnuqnecy reports

9. Certificates of insurance

9. Owner Occupancy Percentages

Lending institutions tend to want HOAs with a high percentage of owner-occupied properties. While the number can vary from one bank to another, most require communities to have at least 70% of their homes or units occupied by homeowners.

This is because there is a higher borrowing risk among HOAs with a high percentage of investor-owned properties. Investors don’t care about the community as much as homeowners do. They rent out their properties and typically favor decisions that bring them the highest profit margin.

Preferred: Capital Planning and Management

While not always a requirement, it is ideal for an HOA to have professional management assistance. Banks want to know that the association is under the guidance of a professional with experience in capital planning and managing capital funds. Associations with a professionally prepared reserve study also have a higher chance of approval.

Can All HOAs Get a Loan?

State laws and an association’s governing documents should determine an HOA’s authority to borrow money. In California, for instance, Section 7140(I) of the Corporations Code outlines this. An HOA’s CC&Rs and bylaws may also contain provisions regarding loans.

Whether or not all HOAs are qualified to obtain a loan depends on the case. To gain access to funding, associations should meet the HOA loan requirements of their lending institution.

How Long Does the HOA Loan Process Take?

From application to loan closing, homeowners associations should expect the loan process to take about six months. However, several factors can affect the timing. These include state regulations and the adequacy of required documents. Reviewing the requirements takes time, so if an HOA has some missing documents or information, it can set the process back.

Can a Bank Deny an HOA Loan?

In a word, yes. Banks and lending institutions do have the option to deny an HOA loan. An association must meet the requirements and qualifications of the bank to ensure its application is accepted. Some banks allow denied HOAs to correct their applications and submit additional documents for reconsideration.

The Importance of HOA Loan Assistance

Homeowners associations don’t have to go through loan applications alone. Some services offer assistance when it comes to applying for a loan. Such services help associations understand the types of loans, complete forms, gather essential documents, look for the best rates and terms, and connect them with the appropriate lending institutions.

An HOA loan assistance service can lighten the burden of loan applications on the HOA board. It is a good option for communities where board members have little experience working with HOA loans. After all, there are many different types, and even just beginning to understand them can prove challenging.

Get Help to be Better Prepared

There are several HOA loan requirements to take into consideration. Although not all banks have the exact requirements, they have similar ones. As such, board members should make preparations before applying for a loan. A good alternative is to hire a professional service for HOA loan assistance.

HOALoan.com provides loan assistance services to HOAs and management companies. Call us today to learn more!