Path to Financing - What is an HOA Loan?
An HOA Loan is a commercial loan, not a consumer loan, and is secured through the Homeowner Association’s rights to assess and collect from it’s members. There are a limited number of banks that offer HOA Loans and they each have different criteria for qualifying and approving an HOA.
The main criteria a bank will consider is the ability of the HOA to collect a future loan payment from it’s members without risk of delinquency. Banks don’t look at the individual unit owner’s personal finances so they evaluate other financial factors such as the current monthly dues, projected monthly loan payment and the estimated value of the individual units.
As a non-profit corporation, the HOA has the ability to specially assess it’s members as long as the governing documents and WA state laws are followed. Owners must approve a special assessment that is tied to the loan amount to ensure the HOA has the right to collect the payments, especially if owners default on their obligation. Banks will consider the risk of future delinquency in several ways and sometimes can offset concern about payments by having the HOA collect the projected monthly loan payment over a period of time to prove there won’t be an issue with owners paying their share of the payment.
HOA Loans are typically amortized over 15 - 20 years and have various rate adjustment periods, depending on the lender and the HOA’s individual criteria. Some lenders offer a line of credit which converts to a term loan and others allow the HOA to skip the line of credit and start repaying the term loan as soon as it’s approved.
An HOA Loan can be an excellent option for an Association facing unexpected repairs or large repair projects and gives the owners the flexibility to make the payments over time to the Association without impacting their personal credit.