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Why a Loan is (Sometimes) a Good Idea for Your Homeowners Association

June 24, 2020 / by HOA Manager

loan applicationYour association board is planning for the big project on the horizon, and is currently reviewing how to finance it. For several reasons, you don’t believe you’ll have enough funds in the association’s operating budget or reserves to cover the project’s entire bill. What should you do? Split the project up over several years, levy a special assessment, or maybe get a loan? As an HOA board of directors you understand special assessments – even though they’re a one-time fee, they can be tough to swallow for everyone. That’s why you should also consider securing a loan. Especially when lending rates are low, a loan is an attractive option. Through a loan, a lender is using an assignment of assessments as collateral.

The Pros and Cons of a Loan

Yes, a loan still has to be repaid and, because of interest, will lead to a higher cost to the homeowner’s association than a special assessment. However, a loan means the association will have all the funds up front to complete the project. You will be able to enter into contracts without worrying about whether all owners will pay a special assessment in full, on time and without the delay and cost of chasing delinquent owners.

Borrowing has many of the equitable features of reserves because the debt service is paid in modest amounts over a period of years. The obligation transfers from one owner to the next as sales occur, thus spreading the costs and benefits in the same manner as reserves.

Remember, whether you end up issuing a special assessment or securing a loan, you have the greater good of the association in mind. Ultimately, this project is about improving the homes and community, and will keep your association a wonderful place to live for years to come.

Your manager can explain more about the pros and cons of securing a loan or levying a special assessment.  Remember that keeping your reserve study current with the help of a reserve specialist can keep your homeowner’s association from being surprised by big projects.

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Topics: HOA Management, Reserve Funds, HOA Fees