What happens if the association cannot make the payments?

The honest answer is that this is uncommon, because lenders underwrite against your assessment income rather than a project’s success, and they typically decline associations that cannot carry the payment. If an association does fall behind, the lender’s remedy runs against the association: it can enforce its right to the assessment stream and, in most structures, compel the board to levy assessments sufficient to cover the debt. No individual home is foreclosed on for the association’s loan, and no owner is personally pursued. The practical risk is not that owners lose their homes; it is that the board loses control of its own budget. Which is the real argument for borrowing an amount your income comfortably supports rather than the maximum you can qualify for.

Are liens placed on individual homes?

No. There is no security interest in any home and owners keep clear title. The loan is secured by the association’s right to collect assessments, which is why lenders underwrite your budget and delinquency rate so closely.

Is anyone in the association individually liable for the loan?

No. The association is the borrower. In the loans we arrange, board members sign on the association’s behalf, not personally: there’s no personal guarantee, and their credit isn’t pulled. The loan does not appear on any individual’s credit or affect their mortgage.

Does our association qualify for a loan?

Most do. We arrange financing for HOA and condo associations in all 50 states. Lenders review your operating budget, reserve study, delinquency rate, and the borrowing authority in your governing documents, not any individual owner’s personal credit.

Loan basics

What Happens When an HOA Defaults on a Loan?

Larry Kirschner · March 25, 2023 · 5 min read

An HOA loan is secured by an assignment of assessments and a UCC-1 filing on the association's collection rights, not by a mortgage on any home. If the association defaults, the lender can direct assessment income to an account it controls without going to court. It cannot foreclose on owners' homes. The association's own lien against a delinquent owner is a separate power and is unaffected.

Whether a homeowners association or condo association needs to borrow for emergency repairs or common area improvements an HOA loan can be a great tool to help bridge the funding gap and a great alternative to a special assessment.

HOA loans are unique financial products. Unlike a mortgage, the loans we arrange are extended to the association without a personal guarantee or an individual credit check, and are typically secured by assessments rather than real estate. The debt is secured using the community association's annual assessments. The lender is, in effect, lending money based on the association's financial profile.

When underwritten responsibly, association loans are considered highly secure. Lenders employ various measures to assess an HOA or condo association's ability to repay debts alongside the intended use of a loan's proceeds. Yet, at the end of the day, if an association stops repaying the principal and interest on its loan, the lender cannot foreclose on owners' homes.

Is my HOA a Good Candidate for an HOA Loan?

Older HOAs are more likely to need to borrow money (for obvious reasons), but newer associations often need funds as well.

Lending institutions have multiple proprietary ways to assess an association's creditworthiness. To satisfy basic loan requirements, bankers and credit underwriters consider market values, annual budgets, and delinquency rates. They like a strong track record of dues collection, responsible budgeting, and record keeping. Lenders also look for solid plans for debt repayment.

Each lender sets its own limits, and they vary widely. The factors lenders look at are in our guide to what HOA lenders look for.

Falling Behind on Payments: Phase 1

In most instances, financial modeling, responsible boards, and good planning prevail. However, lenders have contingency plans should an HOA or condo association start falling behind on their loan repayments.

Typically, lenders will try to work through short-term problems. A lender will likely be sympathetic if an association has issues after changing its accounting systems. They may also understand the stress caused by a change in an association's management company or board members. But they have a business to run and will act on the loan documents if necessary. How long it takes for late or missed payments to become a default depends on the loan documents and the lender.

What a Lender Can Do After a Default: Phase 2

Legal recourse is likely a last resort, and the lender's first step is not a legal one. An HOA loan is secured by an assignment of the association's assessments, so in the event of default the lender can direct assessment income to an account it controls without going to court. In this rare and dire situation, the lender acts almost like a trustee for the HOA. Accelerating the balance, or asking a court to appoint a receiver, comes after that, if directing the income does not resolve the default.

The lender would have first right to their monthly loan payments before turning over the remaining balances to the HOA. The HOA would be forced to function on the reduced cash flows. Monthly trash collection, snow removal, and landscaping budgets would likely suffer. On a more positive note, homes could continue to be bought and sold, and daily life in the community would continue to go on. An association's loan default doesn't go on owners' personal credit, and owners aren't personally liable for the loan. The lender cannot foreclose on owners' homes. The association's own lien against a delinquent owner is a separate power and is unaffected. Like any loan default, it might cause some short-term stress, but it certainly wouldn't trigger complete neighborhood dystopia.

If an association stops paying, in order
Stage	What happens
Falling behind	Lenders typically try to work through short-term problems. How long it takes for late or missed payments to become a default depends on the loan documents and the lender.
After a default	The lender can direct assessment income to an account it controls, without going to court.
If that does not resolve it	The lender can accelerate the balance or ask a court to appoint a receiver.
What the lender cannot do	It cannot foreclose on owners' homes. The association's own lien against a delinquent owner is a separate power and is unaffected.

How Can we Avoid Defaulting on a Loan?

Before defaulting on debt, a Board should increase dues or cut other expenses to remain current on loan payments. Like any financial instrument, HOA loans can be misused.

For this reason, Boards and Management Companies should seriously consider how loan proceeds will be used along with well-thought-out plans for loan repayments. When appropriately used, HOA loans can provide much-needed financial relief to help manage large capital projects. In more than 300 loans arranged since 2016, we haven't had one default.

Is an HOA loan Still a Good Option or my HOA to Consider?

The decision to take out an HOA loan is entirely up to the Board of Directors and the community members. While no one wants to default on a loan, for many associations the advantages of an HOA loan outweigh the potential negative impacts of having outstanding debt. For example, rather than having to raise large amounts of capital by way of special assessments, an HOA loan gives your association the ability to spread out costs over a longer period of time. This can help to reduce the financial burden on individual owners, fulfill the boards fiduciary responsibility and ultimately make the community more equitable for all of it's residents.

HOA loans are available through many financial institutions, and rates and repayment terms vary by lender. It is important to explore all loan options before making a decision.

HOA loan services can help HOAs, Condo Boards, and Property Management Companies model scenarios to support decisions around association debt best practices.

Boards also ask

What happens if the association cannot make the payments?
The honest answer is that this is uncommon, because lenders underwrite against your assessment income rather than a project’s success, and they typically decline associations that cannot carry the payment. If an association does fall behind, the lender’s remedy runs against the association: it can enforce its right to the assessment stream and, in most structures, compel the board to levy assessments sufficient to cover the debt. No individual home is foreclosed on for the association’s loan, and no owner is personally pursued. The practical risk is not that owners lose their homes; it is that the board loses control of its own budget. Which is the real argument for borrowing an amount your income comfortably supports rather than the maximum you can qualify for.
Are liens placed on individual homes?
No. There is no security interest in any home and owners keep clear title. The loan is secured by the association’s right to collect assessments, which is why lenders underwrite your budget and delinquency rate so closely.
Is anyone in the association individually liable for the loan?
No. The association is the borrower. In the loans we arrange, board members sign on the association’s behalf, not personally: there’s no personal guarantee, and their credit isn’t pulled. The loan does not appear on any individual’s credit or affect their mortgage.
Does our association qualify for a loan?
Most do. We arrange financing for HOA and condo associations in all 50 states. Lenders review your operating budget, reserve study, delinquency rate, and the borrowing authority in your governing documents, not any individual owner’s personal credit.

Still deciding? Talk it through with us.

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