Your HOA just received an LOI (Letter of Intent) for the loan you need. Now what?
Hopefully, in your quest to negotiate a loan your HOA will receive a LOI from your bank. This document can also be referred to as a Term Sheet, Memorandum of Understanding (MOU), or Proposal Letter among other things. Before you pop open a bottle of champagne, it may be wise to better understand what you have just received.
Let’s take a step back for a second. Assuming your HOA or Condo Association needs to borrow money, someone should have filled out a loan application on behalf of the Association. As part of the application, that person would have explained who the Association is and why you need to borrow funds.
Letter of Intent
After your bank asks a few more questions, they may be inclined to send you a cleverly worded Letter of Intent (LOI) or a Term Sheet. Upon receipt of this document, many HOA Boards get into trouble. They wrongly assume that this document represents a commitment to provide the association with a loan.
Upon more careful examination, Associations will learn that Letters of Intent and Term Sheets are not legal documents. Rather, they are non-binding communications inviting the Association to move forward with the loan process.
The next step usually involves advancing the application through the bank’s credit underwriting process. Underwriters will most likely require additional information and documentation from the Association. At this point, the decision to lend can either be postponed, approved, or rejected. If rejected, you will need to look elsewhere for your loan. If postponed, the underwriters are most likely waiting for more information.
If approved, the loan advances to the bank’s legal department. During this phase of the loan process, the bank’s lawyers prepare loan documents that are shared with and reviewed by the Association’s legal counsel. It is not uncommon for edits and changes to go back and forth between attorneys. Rarely, but on occasion, the two legal teams cannot come to an agreement. In these cases, the loan cannot advance in the process.
Individual banks approach LOIs differently. Some banks issue LOIs quickly and with little concern for their actual ability to see a loan through to closing. Others take the time to more deeply understand the Association and have a high probability of actually closing a loan before they present a Letter of Intent.
The takeaway is to understand how much work the bank has done in issuing your LOI. It may be a good idea to take a breath and try to obtain more than one LOI for two reasons. First, for pricing insight. It may be your fiduciary duty to get more than one bid on a loan. And secondly, if your bank cannot get your loan through the underwriting and legal processes, it may be a good idea to have a plan B.
Arch Capital Solutions acts as an advocate for your HOA. We have relationships with lenders throughout the country who specialize in HOA loans.