HOA Lending 101: How and Why Associations Use Loans to Fund Big Projects
Big repairs like roof replacements, plumbing overhauls, or deck reconstructions can carry a high price tag. If reserves fall short, boards typically have two options: a special assessment or a loan.
While special assessments require large lump sums from homeowners (which can be financially difficult), loans allow boards to spread out the cost over time through manageable dues increases. It’s a strategic way to protect property values and avoid delays.
What Exactly Is an HOA Loan?
An HOA loan is financing taken out by the association, not individual owners, to fund major community expenses. The loan is repaid using future dues or special assessment income.
When Does It Make Sense for an HOA to Borrow?
A loan can be a great solution when:
- Reserves are insufficient, and the repair is urgent.
- You want to avoid large one-time payments that burden homeowners.
- A project could be phased over the years, but doing it all at once saves time and cost.
What Do Lenders Look For?
HOA loans are assessed differently from personal or business loans. Lenders evaluate:
Most HOA loans are unsecured, but lenders feel confident because HOAs can collect dues and enforce assessments.
Comparing Options: Loan vs. Special Assessment
Tips If Your Board Is Considering a Loan
Before your board moves forward with financing, make sure you’ve covered these essentials to ensure a smooth and informed process:
- Check your CC&Rs: Some HOAs need only board approval, while others require a member vote.
- Choose a lender with HOA experience: Not all banks understand the unique structure and risk profile of homeowners associations.
- Communicate clearly: Present the situation to homeowners early, walk through the loan versus assessment comparison, and be transparent about how it affects them.
- Run the numbers: Will dues need to increase? Are the monthly payments manageable? Be sure to understand prepayment options in case you want to pay off the loan early.
Final Thoughts
A loan can be a powerful way to move your community forward. Rather than being a last resort, it’s a proactive tool that helps boards handle big projects without overwhelming homeowners. It shows you're planning ahead and protecting the long-term health of your neighborhood.
If your HOA is looking to make important improvements, a well-structured loan might be the perfect next step to keep things on track and build a stronger, more vibrant community.
Key Definitions that might help:
Loan Term: The length of time over which the HOA will repay the borrowed funds, typically ranging from 3 to 15 years.
Interest Rate: The cost of borrowing, either fixed or variable, that impacts the monthly payment and total repayment amount.
Collateral: Lenders often secure the loan using the association’s right to collect assessments from homeowners, rather than physical property.
Special Assessment Avoidance: A key benefit of HOA loans. It allows the community to avoid charging large one-time fees to homeowners for unexpected expenses.
Project Scope: Clearly defined repair or improvement needs that justify the loan—examples include roofing, plumbing, siding, or safety upgrades.
Board Resolution: An official board vote authorizing the HOA to apply for and accept loan terms.
Loan Covenants: Requirements imposed by the lender, such as maintaining assessment levels or insurance coverage.
