While HOA fees should be sufficient to cover an association’s operations, it’s not always enough. Natural disasters, lawsuits, and unexpected income shortfalls can all force an HOA into a financial corner. Thankfully, associations can avail of an HOA line of credit to get immediate funding if they come short.
What is an HOA Line of Credit?
An HOA line of credit is a flexible HOA loan with a predetermined borrowing limit. Creditors and banks charge interest based on the amount the HOA has borrowed, not the full borrowing limit. However, the interest rate is variable, so monthly repayments are not fixed. Homeowners associations may pay a higher or lower amount in the succeeding months.
In terms of length, an HOA line of credit often comes with short-term issues. Typically, the credit lines carry terms between one to five years. This makes it ideal for HOAs with short-term financing issues, such as when a natural disaster hits the community.
It’s important to note that an HOA line of credit usually revolves, known as a revolving line of credit. This means the credit limit can be renewed after a certain period. Think of it like a credit card where the credit limit resets every month. This allows you to borrow up to the limit multiple times.
HOA Line of Credit vs Other HOA Loans
While a homeowners association line of credit is common among communities, there are four basic types of HOA loans. Here is how the other three differ from the traditional line of credit:
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Standard Term Loan. A standard term HOA loan does not have a borrowing limit. Instead, the HOA receives the total amount from the creditor upfront. It has a set term period and a fixed interest rate, meaning the HOA pays the same monthly amortization. Typically, these last around 5-20 years.
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HOA Line of Credit With Conversion. This type of loan acts similarly to the HOA line of credit, but it has two phases. The first acts similarly to the standard line of credit. HOAs pay interest based on the borrowed funds. However, when the project is completed, or after 12 months, the remaining loan amount converts into a standard term loan with a fixed interest and amortization.
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Short-Term HOA Loan. Short-term loans are the same as standard loans but with shorter terms. They typically range from 3 to 10 years. Monthly repayments are usually higher than standard loans, but they can be repaid much faster with less interest.
When to Use an HOA Line of Credit
When does an HOA line of credit come in handy? Here are some instances when an HOA line of credit makes sense.
1. Emergency Repairs
Whether because of a storm or poor budget planning, HOAs will inevitably encounter emergency repairs. Often, these repairs cannot be delayed because they pose serious health and safety risks to the residents. Other times, HOAs simply need to make the repairs because it’s mandated in the community’s CC&Rs.
Regardless, an HOA line of credit can be helpful if the community needs immediate financing. The HOA can start repairs immediately while waiting for insurance providers to approve their claims.
2. Seasonal Expenses
Landscaping, snow removal, and tree trimming are considered seasonal expenses. They happen occasionally, so the board cannot always anticipate them. A line of credit can help the board obtain funding during peak seasons, even if cash flow is low.
3. Unplanned Shortfalls
HOA boards do their best to create an accurate budget for the year. But what do you do if an unanticipated expense suddenly comes up? What happens if you need to account for late payments and unexpected variances?
HOAs typically levy a special assessment or dip into the reserves to cover the cost. However, if these options are not feasible, an HOA line of credit can be a financial lifeline for the association. They can fill in the funding gaps until other sources of income become available.
4. Legal Fees
Unexpected legal fees, such as those arising from lawsuits, contract disputes, or homeowner violations, can be costly. It’s nearly impossible to account for them during budget preparation. An HOA line of credit can cover the legal costs without compromising operations.
5. Capital Projects
HOAs often plan significant renovations, upgrades, and additions to the common areas to improve quality of life. However, these can be expensive, especially if the HOA needs more reserve funds. A line of credit can fund these projects until the board can collect all the necessary funds from special assessments, donations, and revenue streams.
6. Refinancing
Homeowners associations may sometimes refinance other debts or pursue a larger loan for a significant project. An HOA line of credit can serve as a temporary financing solution until the HOA can repay previous debts or obtain a different loan.
7. Cash Flow management
An HOA may obtain a line of credit to manage cash flow fluctuations better. For instance, an HOA might expect large insurance payouts or income from a significant event in the coming months. However, it needs to pay many hefty bills today. A line of credit can keep it from defaulting on other payments as it waits.
Are All HOAs Able to Get a Line of Credit?
Can an HOA get a line of credit? Multiple factors must be considered. One is the provisions of the governing documents. Board members must ensure that, before they even think of getting a loan, the governing documents have nothing against it. The governing documents can also outline when and for what reason the HOA can take out a loan.
In addition, state law may have something to say about HOA loans. In California, communities can refer to the California Corporations Code Section 7140 to determine their ability to obtain a loan. Meanwhile, associations in Indiana need to abide by the restrictions of the Indiana Homeowners Association Act Section 32-25.5-3-5.
Apart from these restrictions, HOAs must also qualify for the loan. Different lenders will have different requirements, which usually take months to complete. Banks will typically ask questions about the HOA’s financial history, housing units, monthly assessments, and delinquencies to determine whether or not they qualify.
Frequently Asked Questions
Does a HOA line of credit have amortization?
An HOA line of credit does not have a traditional amortization like regular loans. Instead, HOAs can flexibly repay the loan’s outstanding balance in part or whole.
What is an HOA non-revolving line of credit?
Unlike an HOA revolving line of credit, which HOAs can access multiple times subject to a credit limit, a non-revolving line of credit allows HOAs to obtain a specific amount upfront.
What is an HOA emergency line of credit?
An HOA emergency line of credit acts the same as a line of credit. However, it is typically used to pay for rebuilding and repairing damaged property after an emergency, such as a natural disaster.
Seek Professional Help
An HOA line of credit can be beneficial to communities in many ways. However, it’s important to consider all the different financing options before jumping into an agreement. HOALoan.com can help you obtain the most appropriate line of credit for your community’s size, needs, budget, and financial situation. Call us now to find out more! " ], "datePublished": "2024-07-03T07:00:00+08:00", "author": { "@type": "Person", "name": "The HOALoan.com Team" }, "publisher": { "@type": "Organization", "name": "HOALoan.com", "logo": { "@type": "ImageObject", "url": "https://hoalend.wpenginepowered.com/wp-content/uploads/2024/06/hoa-lend-logo.png" } }, "description": "The experts at HOALoan.com discuss the benefits of an HOA line of credit."}