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A Complete Guide to the HOA Loan Process

person completing HOA loan form

It’s important for a homeowners’ association (HOA) to have adequate operating funds for day-to-day expenses and reserve funds for projects and repairs. However, communities sometimes come up short, and when this happens, they may need to secure a loan or line of credit.

With over 40 years of experience, Associa understands the complicated decisions and workload that go into finding the right financing for your association. Read on to learn the rationale for taking out an HOA loan, HOA loan requirements, the pros and cons of securing an HOA loan, and more.  

What is an HOA loan?

An HOA loan is a sum of money that an association borrows from a lender to fund various community projects and expenses. Like any loan, it must be paid back in full and with interest. There are different types of HOA loans, with different terms outlining the time that associations have to pay lenders back and the interest that'll be added to the principal amount. 

Why take out an HOA loan?

If an association doesn’t have sufficient funds for capital improvement projects, maintenance upgrades, or anticipated repairs, it may need to take out a loan or line of credit from a lender who specializes in HOAs. In many circumstances, these higher-priced projects are funded through an association’s reserve contributions, annual membership assessments, or special assessments. When these methods cannot cover the cost, HOA loans may help fund a variety of projects and expenses for the community.

What are HOA loan requirements and what do lenders require from an association?  

All HOA loan requirements vary. While not all lenders have the capability to lend to an association, those that do may ask for the following information to gauge credit risk:

  • Number of delinquencies and the amount of money involved.
  • Liquidity (the amount of cash as a percentage of annual assessments and annual debt service).
  • Number of units, and how many are owner-occupied.
  • Whether monthly assessments will need to be increased to repay the loan.

What are the pros and cons of taking out an HOA loan?

As with any major decision, it’s essential to weigh the pros and cons of securing an HOA loan for your community.

The pros of taking out an HOA loan include:

  • Homeowners can pay their share over time to reduce the immediate impact on their personal finances instead of making one lump sum payment.
  • Needed repairs or improvements can be completed quickly.
  • Helps maintain property values by allowing structural problems to be addressed and repaired right away.
  • Spreads out the cost of common area improvements over time and assigns the cost of those improvements to the people who are benefitting from them the most.
  • Allows repairs to be performed at current pricing.
  • Individual units can be bought and sold with no impact on the loan.
  • Members’ personal credit isn't impacted by the HOA loan.

The cons of taking out an HOA loan include:

  • Incurred interest over the term of the loan.
  • Ongoing service fees.

What costs are associated with HOA loans?

Incurred fees will vary by request type and lender. Potential lender fees may include costs for the lender’s attorney, interest, notary services, originating, documents, and closing.

How long does the HOA loan process take?

The board of directors should expect the loan process to take approximately six months, depending on state regulations as related to lending timelines from application to loan closing. Various factors can impact the timing, including:  

  • Moving through all the necessary approvals.
  • Some lenders may require membership approval.
  • If the loan is contingent on a special assessment.
  • If the governing documents require membership approval for the loan.

Do homeowners need to be involved in the HOA loan process?

The association's ability to secure a loan is generally outlined in its governing documents. Regardless of the legal requirements, members should be notified of the board of directors’ intention to pursue a bank loan and discuss the process in an open forum where they can speak directly with expert contractors and other involved leadership.

Beyond an HOA Loan: Maintaining Your HOA’s Financial Stability

As a member of your HOA’s board of directors, you’re responsible for maintaining the financial health of the community with things like an HOA loan.  While securing an HOA loan and meeting HOA loan requirements can seem daunting, there are ways to stay on top of your finances and manage your association successfully. Read our article, “5 Tips for Maintaining the Financial Stability of Your HOA” to learn how to keep your HOA expenses—and income—in order.