HOA loans can really keep a community afloat when money runs out, but big repairs often can’t wait. Sometimes, dues just won’t cut it, and the reserve account’s running low. In that case, borrowing becomes the only way to move forward.
What are HOA Loans?
Homeowners association loans are just what they sound like — loans made to the HOA or condo association itself, not to the homeowners. The association borrows money as a whole, then pays it back over time through dues or special assessments.
Whether an association can take out a loan depends on two factors: state laws and the governing documents. In Texas, no law explicitly allows or prohibits associations from taking out loans.
That said, the association’s governing documents also commonly address loans. If the CC&Rs and bylaws allow borrowing, then the board can act on behalf of the HOA to take out a loan.
Who Needs HOA Loans?
Generally, the communities that hit a wall with their budget are the ones that require loans. More often than not, these associations need immediate funding to make repairs or replacements. Others seek loans to upgrade certain common areas, such as adding security gates or new lighting systems.
Can just any HOA apply for a loan? Technically, yes, but not all associations meet the qualifications. Banks and lenders look at the community’s financial health, collection rates, reserves, and paperwork.
If the association has been sloppy with finances or many owners aren’t paying dues, the chances of approval are pretty low. Lenders want proof that the HOA can pay the loan back steadily.
The Benefits of an HOA Loan
When considering taking out a loan, board members should consider the pros and cons. Here are the benefits of HOA loans.
1. Immediate Cash Injection
The biggest benefit of a loan is that the association receives the funds immediately. Instead of saving for years, the HOA can start work immediately.
In comparison, raising dues bit by bit takes a long time. If the HOA needs the funds immediately, it’s not a viable option. An HOA board can levy special assessments, but not all homeowners might pay, especially if it’s a large one.
2. Avoid Large Dues Increases or Special Assessments
Loans allow an association to spread costs rather than charging a hefty, one-time fee. Homeowners don’t get slammed with huge bills overnight, which helps everyone breathe easier.
3. Protect Reserve Fund
Taking out a loan means the reserve fund can stay intact for actual emergencies or long-term repairs. Some boards make the mistake of draining it all to meet immediate needs, but this can backfire later.
4. Flexible Repayment Terms
Many HOA loans range from 5 to 20 years. The exact term can vary depending on the lender and the project. Some even start with interest only, which can help while construction is ongoing.
This kind of flexibility can make a big difference for associations. It helps boards balance their books while keeping the community’s finances stable.
The Disadvantages of an HOA Loan
On the other hand, HOA lending also comes with strings attached. Here are the risks of taking out a loan for the association.
1. Interest
Any loan comes with interest, and associations are no exception. HOA loan rates vary by lender, so it’s best to shop around first. That said, they usually stay competitive, especially for established communities.
Still, it’s an extra cost that builds up over time. The good thing is that most HOA lending companies specialize in this, so rates tend to be fair.
2. Increased Debt
Once the HOA borrows a sum of money, it’s on the hook. Debt can add pressure, especially when collections start to fall behind or owners miss payments.
3. Long-Term Increase in Dues
Loans aren’t free, and associations must repay them somehow. Most boards raise dues a bit each month to make the payments. It doesn’t sound like much, but it can add up over time and even frustrate owners.
4. Liens on Association Property
Lenders usually require collateral in exchange for a loan. This is where secured and unsecured loans come in.
Secured loans are backed by something tangible. Typically, this comes in the form of the association’s right to collect fees or a lien on shared property. Meanwhile, unsecured loans don’t have collateral, but they’re harder to get. Additionally, they’re usually more expensive.
Most HOAs go the secured route since it’s easier to qualify. Moreover, lenders feel safer lending with security.
What are the HOA Loan Requirements?
Getting a loan isn’t just signing a paper and cashing a check. Lenders conduct research and perform due diligence before agreeing to a loan.
Here are the things that HOA lenders usually ask for:
- Governing documents that show the board can borrow and raise dues or assessments.
- Financial statements, including balance sheets, income statements, and budgets.
- A reserve study or a capital plan to demonstrate that the HOA has a sound financial direction.
- Delinquency reports showing who’s behind on dues and by how much.
- Cash and reserve balances show how much the association has in savings.
- Project plans and contractor estimates to see where the money’s going.
- Insurance and compliance records to make sure the association has the proper protections in place.
- Board resolutions or member approval, depending on what the bylaws say.
Once the lender checks all these documents, it will decide the risk level and set the loan’s terms. Sometimes, the loan is structured like a construction line of credit first. After that, it becomes a term loan upon completion of the project. Payments might be interest-only at first, then full monthly installments later on.
HOA Loans vs Special Assessment: Which is Better?
When funds are running low, associations usually choose between a loan and a special assessment. There is no one-size-fits-all solution for HOA financing. It ultimately depends on the association and what the owners can handle financially.
A special assessment is a one-time fee in addition to regular dues. This solution is fast, but it can be burdensome, especially if owners can’t pay in one lump sum. Loans, on the other hand, allow the community to borrow the money now and pay it back gradually through higher dues.
A loan costs more in the long run because of interest, but it’s also manageable. Many boards use a mix of special assessments and loans to balance things out. This way, homeowners don’t feel overwhelmed by sudden financial obligations, and the project can still move forward.
A Smart Financial Decision
HOA loans can save a community from falling apart, both literally and financially. They help boards act fast when things break or when upgrades can’t wait. Still, borrowing isn’t free money. Board members should weigh their options carefully before making a decision.
PAMco offers exceptional HOA financial services to communities in Central Texas. Call us today at 512-918-8100 or contact us online to learn more!
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