HOA Loan & Community Association Borrowing - Frequently Asked Questions

1. What is an assocation loan?
2. What is the collateral for the HOA loan?
3. Is the bank taking a lien on my home?
4. Will I be required to sign any of the HOA loan documents or provide a personal guarantee for the loan repayment?
5. Will I be able to deduct the interest for this HOA loan on my personal taxes?
6. What are my payment options for this project?
7. What are the advantages to borrowing?
8. What are the disadvantages of borrowing?
9. What are the features of the HOA loan?
10. What information is required to underwrite an HOA loan?

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1. What is an association loan?
   An association loan is a commercial (business) transaction that allows associations to fund extensive improvements or repairs quickly and at today’s prices.

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2. What is the collateral for the HOA/association loan?
   Typically, the collateral for an association loan is an “assignment of assessment and enforcement rights”.  This means that if the loan were to go into default, the bank has the right to collect assessments directly from the homeowners to make the monthly loan payments, pay normal operating expenses, fund reserves, etc.

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3. Is the bank taking a lien on my home?
   The bank will have a lien on association assessments, which effectively constitutes a floating lien on your real estate by virtue of the association’s declarations, which are filed in the real estate records of your county.  The only time this lien is affected is if your association dues are delinquent and the Board decides to take legal action.  These are options that are already afforded to your association by Colorado law.

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4. Will I be required to sign any of the HOA loan documents or provide a personal guarantee for the loan repayment?
   Individual homeowner guarantees are not appropriate for this type of loan because it is not a loan to the individuals, but to a “business”, which in this case is your association.  Your association’s governing documents (i.e. articles of incorporation, declarations, and corporate by-laws) will dictate who has the authority to sign loan documents, usually members of the Board.  These individuals are not signing personally, but as representatives of the association.

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5. Will I be able to deduct the interest for this HOA loan on my personal taxes? Because this is a business loan, and no personal real estate is taken as collateral, the individual homeowners receive no personal tax advantage.

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6. What are my payment options for this project?
   
   • Use a credit card- i.e. get a cash advance- normally this would be the least desirable option due to high interest rates and no tax advantage. 
   • Pay monthly and have your assessment become part of the commercial loan payment made by the association- interest rates may be fixed over the life of the loan (depending on term).  No personal information will be required from individual homeowners and the loan becomes the obligation of the association as a corporate entity.

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7. What are the advantages to borrowing?
   
   • The downward slide of property values can be slowed or eliminated when you improve the appearance of the property and eliminate any structural integrity problems.
   • Needed repairs or replacements can be completed more quickly, and at today’s costs, as required funds become available much faster than through the traditional assessment process.
   • The financial impact on owners can be reduced since the loan allows the repayment of your special assessment over time.

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8. What are the disadvantages of borrowing?
   
   • Monthly assessments will likely increase to support the loan payment.
   • Interest rates can change as they are closely tied to the Wall Street Journal Prime Rate.  Fixed rates up to 60-months, however, can lock in the cost of borrowing, making future financial planning easier.  HOWEVER, compare the cost of borrowing to the rapidly increasing costs of construction if the work is delayed or spread out over many years as well as the fact that you may be paying a large assessment increase while waiting an extended period of time for your unit’s repairs.

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9. What are the features of the HOA loan?
   
   • A non-revolving line of credit is put in place during the construction phase, usually from six months to one year, depending on how extensive your project may be.  Interest payments are made monthly based on the daily outstanding balance of the loan.
   • After construction is complete, the balance is converted to a term loan, whereby the association begins to pay principal and interest payments monthly until the loan is paid in full.

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10. What information is required to underwrite an HOA loan?
    
    • The Association’s CPA prepared fiscal year-end financial statements for the past 3 years.  If a CPA does not prepare your statements we will consider the information you do have.
    • A copy of the current fiscal year’s budget if it has been prepared and ratified, as well as year-to-date results.
    • Copies of the Association’s Articles of Incorporation, By-Laws, and Declarations
    • A copy of an engineer’s study on the common elements and the resulting capital reserve plan, if one has been prepared.
    • A copy of the current table for per unit assessments, the percentage of ownership of each unit and the unit owners’ names.
    • As of the last fiscal year end, and to date
    • Number of foreclosures in process
    • Number of units delinquent on assessments and amounts
    • Number of units held by absentee owners (as well as whether they are vacant or rented)
    • Number of units bank or government owned
    • Describe the lawsuits brought by, or against the association, including foreclosures.
    • Describe the complex, number of units, number of buildings, acreage, heating system, etc.
    • Describe the project and how it has been funded in the past if applicable.
    • Copy of the accepted contractor’s bid or proposal and applicable engineer’s report, if available.
    • Sales history, including prices of units sold in last 12 months as well as those units currently for sale.  You should be able to secure this information from a realtor.

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