What is a HOA loan? For many association boards, taking out a loan is the first instinct when they run into funding problems. While loans can certainly address immediate needs, they are not always the right answer. It is imperative to understand how loans work and the requirements attached to them before making a decision.
What is an HOA Loan?
An HOA loan is corporate financing that a lender issues to the association itself, not to individual homeowners. The HOA borrows money as a collective unit, using the funds to pay for major repairs, upgrades, or emergencies. The HOA will then repay the loan, with interest, over time.
What are Loans for Condominium Associations?
A condo association loan works similarly to HOA loans, but there are some key differences. For one thing, a COA loan typically funds shared elements like roofs and elevators within the multi-unit buildings. In comparison, HOA loans tend to fund amenities, such as pools or private roads, in single-family communities.
Another difference involves collateral. Condo associations don’t own much land or structures beyond the condo buildings themselves. This makes it harder to secure collateral.
On the other hand, single-family HOAs usually own properties such as clubhouses, fitness centers, and even private parks. These properties can be used as collateral for HOA loans. That said, lenders often rely on future dues or assessments to secure loans for both HOAs and condominiums.
How Does an Association Loan Work?
Once the board decides to obtain a loan, it must look for a lender that specializes in community association loans. Not all banks offer this type of loan, which usually comes with more flexible terms and competitive interest rates. Boards should shop around to find the best option.
To apply for a loan, the association must submit its financial records. These include the annual budget, the most recent financial statements, current reserve summaries, and delinquency rates. The lender will evaluate these records and determine the loan terms that suit the association’s financial situation.
Keep in mind that lenders often hinge their approval on the association’s ability to repay the loan. If an HOA or condo can offer no collateral, chances are the loan will get rejected.
Assuming the loan is approved, the lender will then disburse the funds to the association. The HOA or condo must repay the loan, with interest, over the duration as stipulated in the agreement.
Can an HOA Take Out a Loan?
Whether or not an HOA can take out a loan depends on state laws and its governing documents. In Virginia, the authority to borrow is expressly granted to HOAs and condominiums under Sections 55.1-1825 and 55.1-1964, respectively.
Additionally, board members should check their CC&Rs and bylaws for guidance on borrowing money. Some associations may need to take additional steps or fulfill certain requirements before obtaining a loan.
If the governing documents are silent, boards can generally take out a loan following a majority vote. Association boards are responsible for keeping the community operational, including securing necessary funding.
Can an HOA Get a Loan Without Owner Approval?
Associations must check their state laws and governing documents to determine whether owner approval is required for HOA loans. Maryland and Virginia laws don’t expressly address this.
That said, the CC&Rs and bylaws may have something to say about it. Many governing documents require membership approval for significant loans (over a certain threshold) or for the special assessments needed to repay them.
At the very least, boards should keep owners in the loop about such decisions. Loans and special assessments should be discussed at a properly noticed open meeting. After all, owners have a right to know about the association’s finances and the obligations that come with them.
Should an HOA Get a Loan?
Loans pose advantages and disadvantages. When deciding whether a loan is right for the community, boards must consider both.
A loan offers immediate funding. If an association has urgent expenses, it can cover the full amount with little to no wait. In comparison, a dues increase takes time, as payment is usually monthly.
Loans also help avoid large, one-time special assessments. Instead of asking owners to pay a significant extra fee in one go, the association can spread it out over the loan term. As a result, owners can manage their household budgets better.
That said, loans add interest to the principal amount, which means associations must pay back more than they borrowed. This can place additional strain on the budget, and owners are still on the hook for repayment. Plus, loans come with potential liens on HOA property if the association defaults.
HOA Loan Requirements
Exact requirements can vary depending on the lender, but guidelines often include:
- Corporate Legitimacy. The HOA must be a legally registered entity.
- Financial Health. Lenders typically review audited financials, past tax returns, and reserve accounts.
- Collateral. Lenders will read through the CC&Rs to ensure the HOA has the legal authority to collect dues and levy special assessments to pay off the loan.
- Loan Term. Lenders will offer loan terms depending on the loan amount, purpose, and policies. Short-term loans span three to five years and are more common for smaller loan amounts. Meanwhile, long-term loans can extend to 10, 15, or even 20 years. These are usually reserved for capital improvements or large amounts.
- Member Approval. If the governing documents require it, lenders will ask for proof of membership approval.
How to Pay Back an HOA Loan
Loans aren’t free funding. Associations must still repay the principal amount, with interest, to the lender over the specified loan term. In general, there are a handful of ways an HOA can pay back the loan.
1. Increase Regular Dues
Dues are an association’s primary source of income, so it makes sense to raise them to meet loan obligations. Boards can adjust the monthly dues to accommodate loan repayment terms.
Of course, it’s best to add a cushion instead of billing the exact amount needed to meet the current month’s repayment. Not all owners pay their dues on time, or even at all. This can result in the association coming up short on the installment.
2. Levy Special Assessments
Special assessments are another option. Most associations have the authority to collect special assessments as per their governing documents. That said, some communities require owner approval for assessments over a certain threshold or if the express purpose is to repay a loan.
3. Tap Into Reserves (Temporarily)
If dues and special assessments fail to cover the repayment, an association may be able to temporarily use its reserves. Of course, this should come as a last resort, as the reserves play a crucial role in long-term financial stability.
Can an HOA borrow money from reserves?
Section 11B-112.3 of the Maryland Homeowners Association Act and Section 11-109.4 of the Maryland Condominium Act both allow the use of reserves for “purposes other than those specified in the funding plan.” That said, both laws require associations to repay the borrowed sum to the reserve fund within five years.
What is a HOA Loan? Answered!
A loan offers immediate funding to associations without sudden spikes in dues and assessments. Still, navigating loans and their requirements can be tricky. Boards must ensure compliance with state laws and their governing documents, plus come up with a reasonable repayment plan. More often than not, hiring professional help is the best course of action.
Keymont Community Management offers expert management services to associations in Virginia, Maryland, and Washington, DC. Call us today at 703.752.8300 or request a proposal to start your journey!
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