HOA Loan Types: Community Funding Options
Four structures cover most association borrowing: a long-term loan, a medium-term loan, a standalone line of credit, and a line of credit that converts to a term loan once the work is finished. A line of credit suits work billed in stages. Terms typically run 5 to 20 years, and longer on larger projects. Which fits depends on how the money is spent.
Homeowners associations and condominium associations collect monthly assessments and fees from unit owners to facilitate effective capital management and financial planning. These not-for-profit business organizations rely on resident participation and financial contributions to function. It is crucial for community members to understand their responsibilities and explore available funding options when addressing cash management issues, common area improvement projects, reserve funding, and other unexpected expenses.
While addressing capital needs can seem like a scary endeavor to HOA boards and property management companies, there are funding options available that can help the community avoid a special assessment.
HOAs can consider borrowing money to firm up their budgets and fund capital projects. However, careful navigation of loan complexities and consideration of relevant terms and conditions are essential. The choice of funding should align with the specific needs of the association, ensuring a suitable fit for their financial requirements.
Below, we will cover some of the basic types of HOA loans available to homeowners and condo associations.
HOA Loans
A loan is arguably the most common source of external funding for any business. An HOA loan is essentially just a business loan for an HOA. These are designed to put communities in a position to cover immediate expenses without creating a strain on homeowners' finances. Many communities that consider HOA loans do so to help pay for large capital improvement projects that their reserves can't cover, but the usage options are broad, and there's some flexibility to the kind of loan an HOA can or should seek out.
HOA loans are typically secured using the HOA's annual assessments as collateral. While all common HOA loans share this characteristic, the key differences lie in the available term lengths. It's crucial to assess loan options based not only on interest rates but also on the repayment terms, as they play a significant role in determining the suitability of a loan.
Long-Term Loans
Long-term loans are pretty straight-forward and used most often for long-term projects. Land acquisition, major community improvements, or extensive structural repairs like new roofs or roads are very common uses for long-term HOA loans. Another reason to consider a long-term HOA loan is that it lowers the monthly burden by spreading loan payment out over a longer period of time, this allows the association to borrow more money.
With any loan, lenders will assess a variety of financial information to determine how associations will repay the debt. Fortunately, there are many highly customizable loan options designed to meet the borrowing needs of most HOAs.
Longer-term funding structures typically have higher interest rates and total interest costs, but monthly payments are more manageable. Terms typically run 5 to 20 years, longer on larger projects, and a longer term is what keeps the monthly payment within reach on a large project.
Medium-Term Loans
Sometimes associations find themselves in a short-term bind, and don't want to opt for a decades-long loan commitment. Projects like sudden pool repairs or moderate structural maintenances like landscaping or painting might only need a shorter repayment period. Our terms typically run 5 to 20 years, and longer on larger projects, so a board can match the term to the life of the work rather than stretching it.
Monthly payments on medium-term loans tend to be higher, but total interest costs are lower when compared with longer-term loans. Medium-term loans allow associations to extinguish their debt or replenish reserve funds in a shorter period.
Standalone Line of Credit (LOC)
Typically, businesses confronting shorter-term funding gaps (anything that needs remedying within a year) aren't seeking out loans. In many cases, a line of credit may be a perfect solution...unless you're an HOA.
Think of a line of credit like a credit card, lenders will only impose an interest charge on the actual borrowed amount. These loan structures typically need to be renewed annually, and the interest rates, while attractive, are often subject to change monthly. This rainy-day type of borrowing may not seem like a terrible tradeoff for a business, but non-profits need to be extremely cautious when considering LOCs.
With a line of credit, the bank has full discretion over whether or not they extend your loan. Because community associations are non-profit entities, if the bank decides that they don't want to extend, the association could be required to come up with a large sum of money in a short amount of time. Without a stable, guaranteed income stream, HOAs in this situation would be out of options to pay without placing a significant financial burden on their membership.
LOC With Conversion
Although a standalone line of credit isn't designed for long-term projects, many associations utilize a line of credit during a large project's construction or renovation phase, then convert the LOC to a longer-term loan upon project completion. Under this program, an association can save interest expense by only paying interest on the borrowed funds. However, they should be sensitive to the mechanics behind fixing the interest rate on the longer-term loan.
In some instances, the HOA may be incurring interest rate risk if the rate for the longer-term loan isn't established until the loan converts from a line of credit to a term loan. In these instances, the monthly principal and interest payment is not fixed until the draw period ends and the facility converts to its fully amortizing term.
What's Right for Your HOA?
No matter what kind of financial support your HOA needs, from funding a capital improvement project, covering unexpected repairs, or raising cash to comply with a recent reserve study, there are options available to communities of all shapes and sizes. HOA Loan Services offers step-by-step assistance for the entire loan process.
Contact us today to learn more about our customized loan solutions for homeowners associations and condo associations.
Boards also ask
What are typical loan terms?
HOA loans typically run 5 to 20 years, depending on project scope and your association’s financials. Longer terms are harder to obtain, so we structure around what lenders will actually approve.
How much can we borrow?
We finance projects from $100,000 with no set maximum. Most associations we work with borrow between $500,000 and $5 million, though we regularly fund smaller projects.
What is an HOA loan?
An HOA loan is financing your association borrows as an entity to pay for a major capital project, then repays out of the assessments you already collect. It is underwritten against the association’s finances and its authority to levy assessments; not against individual homes.
Are there prepayment penalties?
Most lenders allow an association to pay ahead or pay off early from its own funds without penalty. Refinancing with a different lender is treated differently and often carries a fee, so ask how each offer handles both before you sign.
Still deciding? Talk it through with us.
We’ll talk with any board at no charge and no obligation, just answers.