Six Questions to Ask Before Taking Out a Loan
If your HOA board is considering taking out a loan for a necessary repair, it can be difficult to decide whether or not to take out a loan. If you do wish to take out a loan, it is important to consider your unique position, do the necessary preparations, and ask the correct questions before walking into the bank. Here are seven questions your board should ask before taking out a loan.
What Do State Laws Say About Loans for HOAs?
The first thing you should consider is what the state and local laws say about HOAs taking out loans. In some states, it is illegal for an association to borrow out of its own reserve funds. In others, it is against the law to use the reserve fund as collateral for the loan. However, in other states both of these are viable options. Check with the laws before diving in to a plan.
What Do My Governing Documents Say About Loans?
The next consideration should be your governing documents. Following these documents is of utmost importance. The documents will usually outline a maximum amount that can be taken out as a loan, as well as how much can be taken out before gaining the approval of the homeowners.
Is the Bank or Lender Credible?
Your HOA should choose the bank or lender with care. Not only should you trust that your lender is credible, you should also be sure that they are used to working with homeowners associations. You want someone who knows the complexity of the laws surrounding HOAs when it comes to taking out loans.
What Types of Documents Will the Lender Require?
It is important to prepare all of the necessary documentation far in advance of going to the lender. Some lenders will require up to three years worth of financial statements, your annual budget, and other similar documentation. Be sure that your board is able to produce these before moving forward.
Are the Assessments Enough to Cover the Loan?
One of the most basic considerations is whether or not your assessments are enough to cover the principal of the loan, along with expected interest, and any other fees that may be incurred throughout the process. Insufficient funding is a good indication that you should not be taking out the loan, as you may not be able to pay it back in future.
Should You Take Out a Loan or Use Your Reserve Fund?
It can be difficult to decide whether you should out a loan or drain your reserve fund. If you suspect that you may need the reserve fund as an extra backup in case of emergency, then it could be a better idea to take out a loan.
Taking out a loan for a project or repair can be an intimidating. Be sure that your board is prepared and making the right decision for the community by asking these six questions before you make your final decision.