All You Need to Know About HOA Loans
Condominium Associates is here to help you understand the process and answer the most common questions associations have when taking out a loan or a line of credit.
Why Take Out an HOA Loan?
If your association requires repairs, maintenance upgrades, or common area improvements, you may want to consider taking out an HOA loan or line of credit. Loans help fund a variety of unexpected projects when the individual assessment cannot cover the expenses. Another reason to take out an HOA loan is to pay the annual insurance premiums upfront, as most insurance companies discount rates when paid in full. At Condominium Associates, we want our associations to make the best investments possible. We are here to help you understand the process and answer the most common questions associations have when taking out a loan or a line of credit.
The Benefits of Taking Out a Loan
When an association takes out a loan or line of credit, it can maximize its profits. Repairs and maintenance costs can be paid upfront, at the standard rate. They are also performed quickly because the funds are readily available. Also, standard area improvement payments are spread out over time for tenants. Still, the work is getting done on time to keep the community happy and thriving. The only pitfall for community members is they may have to pay a higher HOA fee, depending on the loan type and interest rate.
The Structure of the HOA Loan
While banks will have various HOA loan terms, typically, banks will remind HOAs to put funds aside for loan repayment. Banks will also consider the HOA loan as a business loan, as opposed to any individual investment. It is the association's responsibility to keep community members aware of any upgrades and expenses associated with them. Most HOA loans are principal plus interest loans and can typically last up to 15 years.
What Do HOA Loans Require?
If the HOA loan ever went into default, banks may have the right to collect directly from homeowners. To avoid this, be sure to prepare the proper numbers associated with the loan. One of our Accounting Associates can help you determine if your association has enough funds for the loan. Good news, though, banks cannot put liens on loans, which means units can be bought and sold without any adverse effects on loan.
What do Banks Consider Before Approving the Loan?
To gauge credit risk, banks will ask for information about the following items:
What is the number of defaults and the amount of money involved?
What is the amount of cash as a percentage of annual assessments and annual debt service?
What is the number of housing units and how many are owner-occupied
Do monthly assessments need to increase to pay for the loan?
They will also ask what the HOA officers' management and capital planning experience is.