If your homeowners association’s (HOA) budget and reserves fall short, alternative financing can fund capital improvements or urgent repairs. Many HOAs take out loans to spread the cost of expenses and avoid imposing large special assessments.
HOAs also turn to loans to manage community finances because they don’t involve individual credit risk to the board of directors and unit owners. In loans made to associations, monthly dues often serve as collateral instead of individual or community property.
Financial institutions, especially those specializing in community association lending, help HOAs by offering various loan options. Some banks, credit unions and private lenders provide these benefits.
Types of HOA loans
To secure funds, your HOA can take out:
- Term loans: HOAs get the total loan amount upfront. You repay it over five to 15 years, usually with interest. You can also look into quick-term loans with repayment periods between three to 10 years.
- Revolving lines of credit: This type offers the most flexibility. HOAs can borrow up to a preset limit. Like credit cards, interest is charged only on the amount borrowed instead of the entire credit limit.
- Lines of credit with conversion: These start as lines of credit. They convert to standard loan terms after a certain period, typically after a project’s completion.
- Construction loan: These loans can have variable interest rates. HOAs often complete repayment once a construction project is completed.
- Bond financing: This more complex loan involves issuing bonds to raise capital for long-term projects.
Choosing a loan that fits your situation best will largely depend on its purpose and the financial capacity of the community.
Key considerations
Before securing a loan, it’s crucial to consider the following factors:
- Interest rates and fees: Knowing the total borrowing cost, including interest and fees, can help your HOA decide if it can make timely payments before proceeding.
- Repayment terms: Check if the loan terms fit your community’s budget to avoid disputes later.
- Community approval: Your community’s bylaws might also have provisions requiring HOA membership approval for loans.
- Legal advice: Consulting a HOA law attorney is advisable. They can help ensure the loan terms and conditions meet legal requirements and HOA rules.
HOA loans can be a vital tool for Connecticut communities seeking to improve their property value and quality of life. By understanding the different types of loans available and their implications, your HOA can make informed decisions for long-term community benefits.