How Does A Homeowner’s Association Borrow Money?

A Homeowner’s Association is a non profit association that takes care of the common areas of a housing development area. The job of a Homeowner’s Association is to take care of the upkeep and improvements of a property and they need the money to conduct repairs and improvements.

While the associations do have reserves some major improvements or repairs may over tax these reserves and end up in depleting all of them.

In case of charging a special assessment on the members for raising this amount may lead to delays and non conformance from all the members and in some cases after getting the approvals the association may find it difficult to get the money from the members which may stall the work half way through.

Homeowner’s Associations can borrow money from banks and can quickly start work on the pending up gradations or repairs without significantly burdening its members.

The benefits for the members are that their individual credit worthiness has nothing to do with the loan and they don’t have to worry about anything but choosing the right repayment plan. Additionally there are some HOA friendly banks with divisions specifically dealing with HOAs that makes it a tad easier for them to get the loans.

That does not however mean that the HOAs can get money in a jiffy. Most banks require them to go through a rigorous application process wherein the banks study their reserves, cash flows, delinquency, and other financials and in some cases the banks may also require the Association to be managed by a Certified Common Interest Development Manager.

Normally the banks will provide loans to a Homeowner’s Association to carry out improvement to facilities such as pools, saunas, playgrounds etc. or to carry out repair work on sidewalks, roofs, parking spaces etc.

Once the Homeowner’s Association decides for itself the amounts of the loan they can get the same appraised by a bank and then choose from a host of options for repayment. Since the whole association is borrowing the money individuals are not required to give out their personal information and they can choose the repayment plan that suits them the most.

So in effect while the whole association is borrowing money, all the members need not repay the money in the same manner. Each individual can choose from the various re payment options that the bank presents them with depending on his situation.

The various repayment options include getting into a special assessment with the bank where the individuals will have the option repaying the Homeowner’s Association loan over a fixed term with reasonable interest rates. A special assessment is nothing but an improvement or repair that has been done on a property and for which bonds are issued to repay the cost that has been incurred.

The amount of this loan can generally vary from anywhere from $50000 to $10 million with a repayment period of one to seven years.

If on the other hand an individual can arrange cash there is no need to take any loan and they can straight away pay cash.
One can also take another loan by means of an equitiy loan or equitiy line of credit generally advised if there is some tax benefit to be derived out of it.

The least preferable means is by taking an advance on the credit card, this will entail a very high rate of interest and is only advised when there is something like airfare points or other reward programs attached with it.

Normally for collateral the Bank will not take anything from the individuals rather they will take an assignment on any special assessment related with the repayment of the loan and the association’s lien rights and assessment rights which they have over the individuals.

While an individual may not have much choice in deciding whether they need that new gym or not at least they have the independence of deciding what repayment plan they choose, be sure to go through the fine print and check with your tax advisor before finally settling on any repayment plan.

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