Not every HOA has enough income to remedy each unexpected repair or expense that comes their way. Some projects may require additional capital, and although taking out a loan should not be your first step, some situations do call for external financing. An HOA loan is a sum of money that your association borrows from an institution like a bank or a creditor. You must pay back that loan and any interest you accrue within an agreed-upon amount of time.
If you do take out an HOA loan, make sure that your organization has a research-backed plan that lays out step-by-step how you will pay off the loan in a timely manner.
The Most Common Types of HOA Loans
There are four main types of HOA loans with different uses and rates. Decide which type of loan works best for your HOA based on what type of project you need capital for.
The most flexible kind of loan is a line of credit. This loan has a preset borrowing limit, and your bank or creditor will only charge you interest on the funds you borrowed. Monthly loan payments are not fixed, and you typically have a period of anywhere from one to five years to pay off this kind of loan. If your HOA is recovering from a natural disaster or any other short-term issue, a line of credit is a helpful way to get temporary help.
If your HOA is interested in a large repair/remodel or land acquisition, a standard term HOA loan is best for you. The HOA gets the total loan amount right away, and then pays it back over an agreed-upon term period. You can pay back your sum from five to fifteen years, and the interest rate is fixed, so your monthly payments are the same each month.
A third type of HOA loan is a line of credit with conversation, which has two phases. The first phase is a line of credit in which your organization pays interest on the amount of money they borrowed. The second phase comes at the end of your project or after 12 months, at which point the loan becomes a standard HOA loan. The institution you borrowed from sets the HOA loan rates, and you must start repaying the interest and principal until the end of the term.
Lastly, if you want to get out of debt quickly, investigate a short-term HOA loan. It is a standard term loan but has a shorter term, meaning that although your monthly payments are higher, there is less interest to pay off.
How to Secure an HOA Loan
Before acquiring a loan, make sure your HOAs governing documents and state laws allow it. Your organization’s HOA loan requirements can be found in your CC&Rs, and these documents should outline when and how your board can go about securing a loan.
Nowadays, you can get a loan in person or online. This loan will be designed like a business loan, and you will most likely pay principal plus interest. The HOA should take out your loan under the association’s name. After answering a few questions designed to help the creditor realize the amount of risk they’re taking in allowing you to borrow money, you can expect to wait about six months before your loan is finalized. There are multiple steps and parties involved in this process, so the timing is variable.
Other Considerations
Not only should your HOA have a clear plan on how to pay back the loan amount, but it should also know how they are going to spend the money. This plan should be created with the input of homeowners whether it be by vote or community forum. It’s important for homeowners to know that having an HOA in debt could negatively impact them—some mortgage or financing options could now be off limits and could hurt their property value.
Also, getting a loan should not be a way to avoid raising HOA fees. A loan will require a raise in payments to cover their new loan installments and operations.
Lastly, make sure that whatever bank you choose has a proven track record of specializing in community associations. It’s smart to try and look for institutions that have experience lending to HOAs. Doing your research and taking this simple step is a good way to avoid unnecessary headaches in the future.