HOA Financing for Major Projects: Navigating the Loan Application Process

One of the responsibilities community association board members are tasked with is managing the associations assets and finances. Boards need to ensure that the properties they manage are well maintained and in good working order. Bank financing, which can help fund major projects and repairs, is an option for boards to consider when evaluating the long-term health of their communities.

Community associations may need to seek external funding, such as a bank loan, for association projects that exceed $100,000 — the typical minimum for bank financing of major community association projects.

The loan application process does not need to be a mystery. Read on to learn more about how community associations go about securing a loan to pay for large projects.

Prepare before applying

The loan application process truly begins with laying the groundwork for healthy borrowing and repayment. Before applying for a loan, community associations can put their best foot forward by reviewing their financial affairs and putting them in order.

• Review and, if necessary, amend governing documents to confirm the feasibility of borrowing and to ensure the association’s documents include specific language allowing for securitizing future income/assessments.
• Reduce HOA fee delinquencies to meet lender requirements (no more than 10%).
• Build liquidity in reserves to show financial health.
• Consider necessary assessment increases to cover loan repayments.
• Update the reserve study for accurate financial and maintenance assessments.
• Resolve any outstanding legal issues to demonstrate stable management.
• Generate community support and clearly communicate with homeowners. Proactively review governing documents and bank requirements to determine if a homeowner vote is required to move forward with lending.

Understanding the loan application process

When applying for a loan, remember that while your association is seeking financing, you are also looking for the most suitable banking partner for your needs. To find that partner, you may wish to obtain several competitive bids. The loan application process then involves six key steps:

1. Complete and submit a Request for Proposal (RFP) and current financial statements to potential lenders.
2. Review and receive term sheets and proposals from the lenders.
3. Evaluate each proposal’s terms, rates and repayment process to identify the best option.
4. Sign the selected term sheet, pay the commitment fee and complete the underwriting process by providing the required documentation.
5. Receive loan approval and complete necessary documentation from the lender.
6. Obtain loan proceeds upon closure and funding by the bank.

Your decision should include examining loan terms as well as a bank’s intangible aspects. These may include the bank’s expertise in the community association industry, the quality of its customer service, its understanding of your association, and how well you anticipate it can meet your needs now and in the future.

When the application is complete and approved and a loan is funded, the next step is distributing funds as needed to pay for appropriate projects. Planning the repayment process is essential for an association’s financial health and project success. 

Learn more about the repayment process in our article, How Community Associations Can Manage Loan Repayments for Major Projects.

Alliance Association Bank is devoted exclusively to the rapidly growing HOA and community association industry. Our team partners with community management companies nationwide to provide industry-leading banking and technology solutions. You’ll work with lending and banking relationship managers who specialize in association lending. To learn how we can assist you, connect with one of our experienced bankers today.