How Do HOA Loans Work?

HOA loans and lines of credit² allow your association to fund a variety of projects and expenses, from common area improvements to maintenance and repairs. Many HOAs, CIDs and PUDs use loans or lines of credit as alternatives to a special assessment for unexpected expenses. You can even take out a loan to pay your annual insurance premiums upfront, if your insurance company offers a discount for paying for the year in advance.

It spreads out the cost of common area improvements over time, and assigns the cost of those improvements to the people who are benefitting from them the most. It also allows repairs and maintenance to be performed quickly, at today’s prices.

In some cases, HOAs, CIDs and PUDs may need to increase homeowners’ monthly assessment fees to make the loan payments.

A non-revolving line of credit is used during the construction phase (typically six to 24 months long), with interest-only payments required. This line converts to a term loan once the project is complete, typically from five to 15 years in length.

Typically, if the loan went into default, we’d have the right to collect HOA, CID, and PUD assessments directly from the homeowners. Individual officers and homeowners are not required to personally guarantee an HOA loan or line of credit, because the borrower is the HOA, which is a separate business entity.

To gauge credit risk, we’ll ask for information about:

• Number of delinquencies, and the amount of money involved.
• Liquidity (the amount of cash as a percentage of annual assessments and annual debt service).
• Number of housing units, and how many are owner-occupied.
• Whether monthly assessments will need to increase to pay for the loan.
• HOA officers’ management and capital planning experience.