Homeowners’ association (HOA) boards need to be smart with money to keep their community running smoothly. However, there are instances when HOAs don’t have enough capital in their accounts for large-scale projects or unexpected expenses. In this case, board members can take out HOA loans to fund these projects.
HOA loans are a major undertaking for any community. It not only affects the HOA’s finances but it can also impact homeowners on a personal level. That’s why it’s important to have a clear understanding of HOA loans as well as their pros and cons.
What Are HOA Loans?
Ideally, HOAs should have adequate operating funds for day-to-day expenses. They should also have a reserve fund allocated for improvement projects, anticipated repairs and renovations, and unexpected expenses that may come up in the future. If your HOA has insufficient capital, the board may need to secure an HOA loan.
When an HOA takes out a loan, their bank provides them with the money they need to finish current or future projects. The HOA then repays the amount of the loan over a certain period of time. However, they will end up paying more due to the added interest
Apart from HOA loans, the board can pursue other sources of funding such as special assessments. This is a one-time fee that puts most of the financial burden on the homeowners. For that reason, board members end up securing HOA loans instead.
To know if this is the right move for your community, you need to consider the advantages and disadvantages of HOA loans.
The Pros of Taking Out an HOA Loan
1. Quick Funding
Even if your HOA has adequate reserve funds, the board will not want to deplete it. A reserve fund is crucial in case there are unexpected expenses or emergencies. Instead, the board might release funds from the reserve fund in smaller increments. This means that improvement projects, repairs, or renovations may take a longer time to finish.
When you take out an HOA loan, though, you’ll be able to receive the full amount that the community needs. You’ll be able to quickly implement changes, whether it’s fixing the roof or purchasing new equipment for the clubhouse.
2. Lower Dues for Homeowners
From the perspective of homeowners, HOA loans are more manageable than special assessments. With the latter, homeowners are responsible for raising funds for their HOA’s planned projects. They need to come up with the money up-front and within a short period. This can be extremely unrealistic and stressful, especially since homeowners will have a hard time coming up with the added assessment fees. With an HOA loan, homeowners will still experience an increase in their monthly dues, but it will be a slight increase compared to a special assessment.
Also, since HOA loans are paid over time, homeowners will only need to contribute for as long as they are living in the community. For example, if an HOA took out a 15-year loan, a family that only lives in their house for 10 years will only have to pay for those years. Payments for the remaining 5 years will then be passed on to the new owners.
3. A More Effective HOA Board
An HOA loan also allows your board to be more effective. With enough capital in your HOA’s accounts, the board members will be able to carry out planned projects such as maintaining infrastructures and resurfacing driveways. The HOA loan can even be used to acquire more land or pay insurance premiums up-front for a discount.
The money from an HOA loan can also be used for unexpected expenses. For example, shared areas in the community may sustain damage during the hurricane season. With enough funds, the board can make the necessary repairs and renovations in a timely manner.
If the HOA board is able to carry out their duties well, the homeowners will be able to see that the dues they pay each month are used for the betterment of the entire community.
The Cons of Taking Out an HOA Loan
1. Using the HOA Loan for the Wrong Reasons
By taking out a loan, you are putting your HOA in debt. In most cases, this is necessary for the maintenance and upkeep of the community. Taking out an HOA loan could be disastrous if you use it for the wrong reasons.
An HOA loan shouldn’t be used to offset monthly dues. For example, if the HOA board promised homeowners that they won’t raise the fees, they might take out a loan to pay for the increased operating costs. Do note that putting your HOA in debt, for this reason, is not good in the long-run.
While no one really wants to pay higher dues, it’s understandable that the board will have to increase dues at some point. As structures in the community experience more wear and tear, they will also need more maintenance. Nevertheless, these increasing operating costs should be included in the budget. The board should not resort to HOA loans for these expenses.
HOA loans also shouldn’t be used for unnecessary expenses. The homeowners will just end up overpaying for items or services that the community didn’t need in the first place. You will be putting your community in debt for no good reason.
2. Dealing with Delinquent Homeowners
All HOAs will have their fair share of delinquent homeowners. These are the members who are not paying their monthly association dues. If you take out an HOA loan, you might experience delays and issues when it comes to paying back the loan.
This will put a bigger burden on the owners or the other homeowners. In some cases, the bank may even tap your reserve funds for the monthly loan payments. Dealing with delinquent homeowners can also cost you more if you decide to pursue legal action.
So if you’re planning to take out an HOA loan, you need to be aware of delinquent homeowners. In this case, it might also be better to opt for a special assessment. This will provide the HOA board with the opportunity to identify the non-paying members in their community. Once the delinquent homeowners are dealt with, the board will be more confident in taking out an HOA loan.
3. Managing the HOA Loan
Taking out an HOA loan is no simple task. You already need a lot of preparation just to apply for a loan. To assess your credit risk and determine HOA loan rates, the bank will ask for a lot of information such as the number of houses/units in the community, delinquency rates, amount in liquid cash, a recent reserve study, annual and interim financial reports, scope of the planned project, and estimates from contractors.
Then, after securing an HOA loan, you also need to manage it so that you can make the loan payments each month. Given these requirements and demands, there is a lot of burden on the HOA board. You also need to ensure that the board is qualified to deal with all the HOA loan requirements. If not, you can always consult with an HOA management company. They will help you take care of all the financial and legal aspects of your HOA loan.
Should My HOA Take Out a Loan?
Capital is very important in maintaining any community. HOA board members need to have enough money in the budget for daily operating costs as well as reserve funds for future expenses. If an HOA doesn’t have enough money, they can secure HOA loans. With a better understanding of the concept, you can now confidently answer homeowners who are asking, “What is an HOA loan?” Explain to all your stakeholders that this will allow the board to carry out improvement projects as well as regular maintenance and repairs.
Take note, though, that HOA loans will put your community in debt. That’s why it’s important to know all the pros and cons of taking out an HOA loan. By considering all these aspects, the HOA will be able to decide if this is the right move for the community. If you need more information, don’t hesitate to reach out to an HOA management company.