When a homeowner, landlord, or co-op corporation needs to fund a large capital project, they have the option of securing a loan with their real estate. In all those cases, a conventional mortgage - a loan secured by real property - is the most typical method for obtaining the funds needed to do the work, and for repaying that money over a manageable period of time.
Condominiums and HOAs though, represent a different kind of ownership, in which individual owners are the ‘kings-of-their-castles,’ with a deed to their individual units, but where the community - in the form of the condominium or HOA association - owns the common areas within the community. The nature of the collateral is very different from the fee simple holding of a private home, a rental property, or a co-op. It is not considered sufficient collateral by lenders for a conventional mortgage instrument.
Condo & HOA Financing Alternatives
Larry Kirschner is a partner with Arch Capital Solutions, a firm specializing in HOA loans located in Naples, Florida. “Associations generally rely on dues, assessments, and fees paid by their members to finance their activities, including capital projects,” he says. “Oftentimes though, imposing large assessments to pay for community-related capital projects poses a burden to owners. One alternative a board may have is to finance the project by borrowing the funds and repaying them over time. HOA loans are available, and allow the board to complete a project immediately, and then spread the payments out in smaller increments over an extended period of time.”
How Do HOA Loans Work?
Unlike mortgages or auto loans, Kirschner explains, HOA loans typically don’t require borrowers to pledge assets as collateral. Instead, these types of loans are commonly referred to as “cash flow” loans because lenders are looking to the future cash flows (in the form of dues and/or special assessments) as security to repay the loan. Lenders focus on the amount of income coming into the association each month, then look at the association’s expenses to determine if there will be adequate cash flow to repay the principal and interest payments.