Project loans
A bank loan is a third way to pay for a capital project, alongside reserves and a special assessment.
A project loan is money an association borrows, usually from a bank, to pay for a capital project when reserves and special assessments together aren't enough. It's one of three funding paths boards use, alongside reserve funds and special assessments. Loan terms are set by individual lenders, so no interest rate or repayment schedule is standard across associations.
Where a loan fits among your funding options
When a capital project costs more than reserves and a reasonable special assessment provide together, a bank loan is the third tool boards use to close the gap. FirstService Residential describes reserves as the funding source most boards look to first, because a reserve study lists the components, tracks their condition, and calculates how much the association should already be setting aside. A loan is not a shortcut around that process, it's what a board reaches for when the amount left over after reserves and a reasonable special assessment is still too large.
"When associations need to finance major capital item repair, replacement, or restoration, they have 3 basic options available: reserve funds, special assessments, or obtaining a bank loan."
Source: How can my association fund an HOA capital improvement, FirstService Residential
Why a loan can beat a special assessment
A loan can also solve a problem a special assessment sometimes creates. If your association funds a critical repair with a special assessment collected over several years, and the repair itself stays unresolved in the meantime, it can make units hard to sell or refinance. Fannie Mae's underwriting guidance treats an unremediated critical repair as a red flag that can make the whole project ineligible for mortgage financing, affecting every owner trying to sell or refinance, not just the ones behind on payments. A loan that funds the repair right away, then gets repaid by owners over time, closes the gap between the assessment being approved and the repair actually being done.
"if the special assessment is associated with a critical repair and the issue is not remediated, the project is ineligible"
Source: Selling Guide, B4 2.1 03, Ineligible Projects, Fannie Mae
What to confirm before your board borrows
Two things are worth checking before your board signs anything. First, whether the board can borrow at all without a membership vote is set by your CC&Rs and bylaws, and possibly state law; read your governing documents or ask the association's attorney before assuming the board can act alone. Second, don't assume a standard interest rate, loan term, or loan-to-value figure exists for HOA loans, because none does. Loan terms are set by the individual lender based on the association's financials, the project, and the reserve study backing it up, so two associations borrowing for similar projects can end up with very different terms. Get more than one lender's proposal before comparing a loan against a special assessment, the way you would compare contractor bids, and confirm exactly how repayment will be built into future assessments.
Check yourself
Answer before you read the explanation, recalling it is what makes it stick.
A board member says the bank loan for the roof project will just carry "the usual HOA rate." What should another director say?
A community has an unresolved critical repair that the board funded through a special assessment collected over three years, and a resident wants to sell now. Under Fannie Mae's guidance, what's the risk?
Before signing a loan agreement for a capital project, a board member wants to confirm the board actually has authority to borrow. Where should they look first?
Sources
- How can my association fund an HOA capital improvement, FirstService Residential
- Selling Guide, B4 2.1 03, Ineligible Projects, Fannie Mae
- Avoiding a Financial Fumble, CAI Illinois Chapter, Community Associations Institute
Related elsewhere in the Academy
Capital Projects
Next, see how special assessments work when a loan isn't the right fit.
Loan interest rates, terms, and loan-to-value requirements are set by individual lenders, not by any standard. Whether your board can borrow without a membership vote depends on your governing documents and state law.