Here’s What Lenders Need From You
If your HOA lacks the financial resources it needs to move forward with a project, there are a few things you should know about how to get an HOA loan. HOA loans are not like home or auto loans. That’s why HOA board members should be aware of the key things a creditor will look for in deciding whether or not to lend to you.
1. Units, ownership and occupancy
The general configuration of your HOA plays a large role in helping creditors decide how risky your loan might be. While you may not be able to change these things, board members should be aware of the facts and figures that a lender will take into account.
In general, lenders view associations with larger numbers of units more favorably than those with fewer units. Logically, this makes sense because of the diversification of risk. For example, if one owner in a 5-unit association stops paying their HOA dues, that equates to a 20% delinquency rate. Conversely, if one person falls behind in a 500-unit HOA, the delinquency rate is just .2%.
Lenders will also want to understand ownership concentration. If a single owner controls a material number of units, lenders may be more skittish about your loan. That’s because there is a greater inherent risk if that one owner were to default.
Along the same lines, lenders will be interested in knowing how many units are being used as rentals or vacation homes. Generally speaking, there is a more emotional attachment to homes that are owner-occupied and hence more willing to invest in taking care of properties and making improvements.
Lenders want to understand the past, present, and projected future financial profile of an association. At a minimum, they will look at current financial statements (balance sheets and income statements) to see how well the HOA is actually performing versus plans or budgets. They will most certainly pay special attention to an association’s accounts receivable aging report.
If an association shows any signs of poor planning, irresponsible spending or inadequate collection of dues, lenders will be reluctant to commit to a loan. They may view any new money as sustaining substandard performance. These shortcomings equate to greater risk for the lender, who strives for a very high degree of confidence that they will be repaid.
3. A Letter of Intent (LOI) is not a firm commitment
Often times, borrowers mistakenly believe that an LOI from a bank means they have secured a loan. In reality, a LOI is nothing more than an indication of interest and an invitation for a borrower to continue the loan process.
LOIs are non-binding documents. Commitment letters, on the other hand, are exactly as their name implies. Commitment letters represent an intent to fund a loan. Boards should carefully assess the documents they receive from their banks to be certain whether it means “let’s keep talking” or “you got the loan.”
4. Assessments as collateral
In most cases, HOAs cannot provide tangible property as collateral for a loan. Additionally, reputible lenders won’t ask owners to pledge their homes or other assets. That’s why lenders are especially interested in exactly how HOA members will pay back the loan. They will want to know how drastic the financial impact might be to homeowners.
For instance, if a HOA needs to increase monthly dues by 100% in order to repay a loan, that’s a significant burden. Lenders would much prefer to see more moderate dues increase, e.g. a dues increase of 15% or less. Again, it’s all about risk. A lender wants assurance that additional monies needed to repay their loan have a high likelihood of actually being collected.
In conclusion, there are many other things that you need to know about HOA lending. The list above is not exhaustive. Always do some homework so your HOA won’t be caught off-guard or enter into a suboptimal loan.
Arch Capital Solutions acts as an advocate for your HOA. We have relationships with lenders throughout the country who specialize in HOA loans.
In many states, the board may actually have a fiduciary duty to make financial decisions that are in the best interest of their members. Arch Capital Solutions can satisfy those fiduciary duties acting as the HOA’s financial advisor. We help HOAs obtain financing and choose the best proposal from multiple lenders.