What is a HOA loan? This financial tool can help struggling homeowners associations access funds in the short term without levying steep fees in a single lump sum. Not many board members understand how HOA loans work and what the process entails.
What is a HOA Loan?
A homeowners association loan is a sum of money that an HOA borrows from a creditor, typically a bank. Loans require HOAs to pay back the principal with interest according to an agreed-upon schedule.
When obtaining a loan, HOAs must aim to work with a competent bank that offers loans specifically designed for community associations. Because HOAs work and are structured differently compared to businesses, they have unique needs that not all banks may be in tune with. Looking for a bank specializing in HOA loans or one with experience working with HOAs is paramount.
The main advantage of taking out an HOA loan is that it allows the association to spread costs over a longer period. It also will enable HOAs to perform urgent maintenance and repairs, with the added benefit of doing so at today’s prices.
What is a HOA Loan For?
There are many ways an association can use HOA bank loans. In general, HOAs use loans to quickly compensate for insufficient funds due to delinquencies or poor funding. They can go towards capital improvements, maintenance work, and critical repairs.
Long-term maintenance, repairs, and replacements would typically be covered by an association’s reserves. However, not all HOAs have adequate reserves, while others don’t have them at all. When an HOA’s reserve funds – as well as regular dues and special assessments – fail to cover these expenses, loans can prove helpful.
How Do HOA Loans Work?
Structurally, HOA loans work in much the same way as business loans. Banks or creditors lend HOAs a principal amount, which HOAs must then pay back with interest. Associations must use their HOA’s name to take out the loan. While payment schedules can vary, the maximum term period for repayment is usually 15 years.
With the advent of technology, applying for HOA loans has become more convenient and straightforward. HOAs can now apply for loans both online and in person. Banks will perform their due diligence and evaluate whether or not an HOA is qualified to secure a loan. This typically involves reviewing financial statements and asking questions to determine the level of risk.
Examples of questions a bank or creditor might ask include:
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How many homes or units are in the HOA?
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How many homes or units are owner-occupied?
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What are the HOA board’s past experiences with capital planning?
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How much are monthly dues?
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How does the HOA board expect to earn enough revenue to repay the loan?
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What is the delinquency rate in the HOA?
How Long Does the Loan Process Take?
While HOA loans are a short-term solution, associations shouldn’t expect to walk into a bank and back out with more funding on the same day. The loan process usually takes about six months from the time of application to the finalization of the loan.
However, several factors can affect the duration of the loan process. These include the following:
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State regulations
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Approval timelines
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Special assessment contingencies
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Membership approval (whether the requirement stems from the governing documents or the creditor)
Different Types of HOA Loans
There are four main types of HOA loans: line of credit, line of credit with conversion, standard term HOA loan, and short-term HOA loan.
A line of credit is a flexible loan with an allotted limit for borrowing. The bank will only charge interest on the amount the HOA borrows. Interest rates can vary, though, so monthly loan payments can also change. Lines of credit range from one year to five years. It best suits HOAs seeking short-term funding.
A line of credit with conversion involves two stages. In the first stage, the loan resembles a simple line of credit, which means the bank charges interest on the amount the HOA borrows. After 12 months or upon the completion of the project, the loan converts into a standard-term HOA loan.
With a standard term HOA loan, the bank immediately provides the total loan amount. The HOA will then make repayments over a specified term, which can sit between 5 to 15 years. Unlike lines of credit, the interest rate of a standard loan is fixed. Thus, this is best for larger projects.
Finally, a short-term HOA loan is similar to a standard-term HOA loan but with a shorter repayment term. The term period ranges from 3 to 10 years.
Can an HOA Get a Loan?
To determine whether an HOA can get a loan, board members must review its governing documents. The CC&Rs and bylaws should outline the board’s authority to obtain a loan and define under what conditions and circumstances the board can do so. Most often, associations require a majority vote of approval before applying for a loan.
In addition to the governing documents, state laws can also give the authority to secure a loan. In California, for instance, Section 7140(I) of the Corporations Code outlines this authority. Some even have notice requirements.
Even without state laws requiring notice, a competent HOA board will notify homeowners of the impending loan and what it entails. The HOA board should also consider including the topic in the board meeting agenda and allow owners to provide input. For example, a portion of the open forum can be dedicated to the board’s intention to obtain an HOA maintenance and improvement loan.
Do You Need Collateral for a HOA Loan?
Most banks don’t require collateral from associations to secure an HOA financing loan. Banks understand that HOA loans work differently than other loan types.
However, an HOA should only consider obtaining a loan if it can repay the principal with interest. Loans are not free funding. If an HOA does not have the means to repay the loan, it shouldn’t take one out in the first place.
Typically, if the HOA defaults on the loan, banks would have the right to collect dues and assessments directly from homeowners.
Who Pays for the HOA Loan?
The HOA is the party that enters into the loan agreement with the bank or creditor. Therefore, the HOA is responsible for paying back the loan. An HOA secures repayment funding through homeowner payments in the form of regular dues and special assessments.
Generally, an HOA will raise regular dues or levy special assessments to fund repayment. As such, a loan is not a way to avoid increasing dues. If anything, it guarantees it. However, the HOA board should check its governing documents to understand what options are available.
Is a HOA Loan a Mortgage?
An HOA loan is not the same as a mortgage. For one thing, they have entirely different purposes. HOA loans usually cover capital improvements and unanticipated expenses. Meanwhile, mortgages cover property.
With a mortgage, the property serves as the guarantee or collateral for the loan. In comparison, HOA loans don’t have physical collateral. Instead, banks can collect dues and assessments from homeowners if an HOA defaults on their payments.
What is an HOA Loan? Answered!
Now that HOA boards know what an HOA loan is, they can make informed decisions based on state laws, their governing documents, and homeowner input. Loans function as added funding if an HOA is short on money, but an HOA should ensure it has a financial plan to repay the principal and interest.
HOALoan.com provides loan assistance services to HOAs and management companies. Call us today to learn more!