Every Question a Board Should Ask Before Getting an HOA Loan

Homeowners Association loans have a lot of benefits to offer to HOA and condo communities. They can offer financial support during large capital improvement projects, or help an HOA rightsize their dues. But they can be complicated and confusing. Not every loan is right for every community, so if your community association is considering an HOA loan, here are the questions you need to be asking before taking that step:

Questions About Your HOA's Motivations

First and foremost, your community needs to know the motivation behind seeking out an HOA loan. Borrowing money for the sake of borrowing is not a strong reason to take on a large financial responsibility. On the other hand, funding improvements like landscaping projects and taking care of unexpected expenses like roof repairs both stand out as responsible reasons to consider an HOA loan. Like any financial transaction, board members should have an elevator speech prepared to concisely state the purpose of the loan and the benefits to the association. Before you get to that point though, ask yourselves:

• Why are we asking for a loan?
• Should we be asking for a loan at all?
• What do we expect this loan to do for our current and future financial goals?
• How do our members feel about borrowing money?

Questions About Legal Authority and Obligation

Before an HOA can even attempt to procure a loan, it's important that they know if they're even legally permitted to do so. Not all communities are! An HOA must have the proper authority to enter into a loan agreement, so be sure to ask the following questions before investing too deeply into the HOA loan acquisition process:

• Do our bylaws allow the HOA to do acquire a loan?
• Do we need a member vote, and if so, what vote results are actually needed?

Questions About the HOA's Financial Health

A lender will want to understand the association's plan for repayment. If the HOA has a high delinquency rate, little to no money in reserves, and an entirely disengaged membership, lenders will be skeptical. Think about these things before approaching a lender:

• Is our financial house in order?
• Do we have any delinquent homeowners?
• What is our estimated project cost?
• Do we have a reserve study?

Questions About the HOA Dues

One of the many benefits of an HOA loan is the moderate increase to monthly assessments. Without an HOA loan to handle a major component replacement or repair, any costs not covered by the Reserve Fund would get passed on to homeowners via a sizable special assessment. Instead, HOA loans are typically repaid through more reasonable increases in HOA dues. That said, lenders will be skeptical of proposed HOA increases if they appear to be out of line.

• How successful is our current dues structure?
• What is the proposed increase?
• Are members receptive to the proposed increase?
• What is the current delinquency rate?

Questions About Loan Acquisition Strategy

Getting a loan is no simple task. Financial institutions (banks) are looking for a very specific set of criteria to be met any time anyone (not just HOAs) apply for a loan. So when the time comes to start seriously scoping out loan options, you'll want to take all of these concerns into consideration:

• What information do we need to gather before presenting to a bank?
• What happens if some of the information is missing?
• If we get denied, what are the chances the bank will reconsider?
• What is a loan broker?
• Why is a loan broker typically more cost-effective?
• Does using a loan broker give our community an advantage in attaining a loan?

Questions About Interest Rates

Once you've sorted out the viability of seeking out and acquiring an HOA loan, asking about the loan specifics will be important. When sitting down with a potential lender or loan broker, get the scoop on current loan interest rates and your community's long-term expectations:

• Is the rate fixed for the life of the loan, or will it reset at some point in the future?
• Is there a refinancing option?
• Should future boards consider refinancing if it is available?
• Will our HOA have to pay any origination points at closing? If so, how many and how do they factor into the effective interest rate?
• If there is construction involved, how and when will the loan rate be established?

Don't Go It Alone

At the end of the day, acquiring an HOA loan is difficult and time consuming. Knowing the right timing, the right lending institution, and the right type of loan sometimes means you also need a helping hand. HOA Loan Services is dedicated to providing assistance for communities seeking funding every step of the way. Contact us for more information to ensure a smooth capital planning experience for your association.