How to Prepare Before Applying for a Community Association or HOA Loan

Many community associations contemplating large-scale capital improvements  first look to fund their needs with cash reserves. While a 100% funded HOA or community association reserve fund is ideal, many associations aren’t fully funded. For day-to-day operations, a good rule of thumb is that maintaining at least 70% reserve funding is adequate for meeting the National Reserve Study standard of reserve adequacy, according to Association Reserves, a leading reserve study provider.

For one-time or unexpected projects, an alternative to depleting your reserves is to obtain a loan with a bank that specializes in association lending. The following overview provides a basic game plan for financing your association’s capital improvement with loan funds.

Step 1: Gain borrowing approval

The first step is to contact your association’s management company and attorney to assess the steps to obtain approval to enter into a loan. Your loan will be secured by an assignment of the association’s assessments. Therefore, the association’s governing documents must permit it to enter into a loan and pledge its assessments as security.

Step 2: Determine a repayment plan

Next, the association needs to determine what means you will use to repay the loan. For smaller loans, an increase to regular monthly assessments may be a feasible way to make loan payments. Another option could be implementing a special assessment wherein each unit owner would pay upfront or participate in the loan program. 

In either case, you’ll need to consider the board or homeowner approval(s) necessary to implement the desired repayment structure. You won’t need to have the structure in place before you apply for the loan, but in most cases, the structure will have to be approved before closing the loan. However, putting an increased regular assessment or special assessment in place before you apply for a loan can demonstrate to your bank that your association has both community support and the ability to repay the loan.

Step 3: Choose the type of association loan

When applying for a loan, your bank will want to know what type of loan and loan term you’re seeking. For large, lengthy projects, your bank will likely offer the option of entering into a non-revolving line of credit for the construction period. These lines of credit typically last six to 24 months. During that time, you’ll make interest-only payments on the amount drawn. 

When construction ends, the line will convert to a fully amortizing term loan. A typical term loan is for five to 15 years. It is important that the loan length not exceed the useful life of the financed improvements — you don’t want to be paying for improvements that have outlived their lifespan. If the project is smaller or short-term, it may make sense to forego the draw period and immediately enter into a term loan. The sooner you begin paying the principal, the sooner your association pays off the loan.

Step 4: Prepare for the application process

When your bank evaluates a loan request, it may use several key metrics to gauge your association’s credit risk and ability to repay the loan. Some factors the bank may consider during the underwriting process include:

If your association has ratings of fair to strong in most of the factors above, you will have higher chances of being approved for a loan. 

For a borrowing process that takes into account your unique needs, with expert bankers who can answer all of your questions and guide you through the application process, look for a bank with deep experience in the community association sector. To learn more, contact your Alliance Association Bank relationship manager or find out more about what our bank can offer associations like yours.