Guide to HOA financing options

When it's time for one of your homeowners associations, or HOAs, to finance a capital project, how do you help them secure the funds?

You could charge homeowners a special assessment or dip into HOA cash reserves, but these options can put added pressure on residents or the association. Another path to consider is financing through a bank that specializes in loans designed for HOAs. This type of financing allows associations to move forward with capital improvements without depleting reserves or creating financial strain.

Raising assessments versus borrowing for projects

When deciding between internal and external funding, HOA board members should consider the long-term impact of each approach.

Some boards may be tempted to use reserve funds to pay for a capital improvement. However, governing documents and state law may restrict the use of these funds to repairs and replacements instead of new projects. Additionally, using reserve funds depletes liquidity that may have been earmarked for other projects.

Raising money through a special assessment—a one-time fee charged to homeowners to cover a specific expense—can seem straightforward but may strain residents financially or create tension with the community. It can also slow progress if collections run short.

In contrast, financing allows the association to complete all phases of a project at once, maintaining a consistent community appearance while spreading repayment over time. In this video, Jeff Barnett, Director of Community Association Banking Services at First Citizens, explains how financing can help avoid the pitfalls of phased construction.

Is community association bank financing a good fit?

With community association bank financing, a loan is made directly to the association, which repays it using funds collected from homeowner assessments over multiple years. This approach helps avoid large, upfront payments while allowing the association to continue contributing to its reserve funds.

Advantages of using a bank with HOA experience

Banks that specialize in community association lending offer more than just capital. They bring deep industry knowledge to guide HOAs and management companies through the entire financing process, from loan selection to homeowner communication. Experienced HOA bankers can even attend meetings to explain loan terms and answer resident questions.

HOA banking specialists also can help management companies with questions related to best practices used to address financial operations around HOA financing. They'll work closely with accountants and attorneys to ensure everyone understands the typical methods of payment and operational aspects of a financing program.

When evaluating lenders, HOA boards should consider financial strength as well as experience. Banks with long histories serving HOAs—and strong balance sheets—are often better positioned to fund projects on favorable terms and provide dependable, ongoing support.

Types of financing available through association banking

It's important for HOA boards to understand the details of HOA loans available to determine which type of financing is best for any given project. Community association banks typically provide HOAs with multiple loan options that can accommodate a range of projects and budget sizes.

For example, First Citizens offers three HOA lending options.

• Quick-term loans: Up to 10-year terms, no minimum loan amounts and 3- to 5-day turnaround times when limited documentation is required
• Traditional term loans: 5- to 15-year terms with fixed rates and no maximum loan limits
• Revolving lines of credit: Useful for short-term cash flow shortfalls at the community, with limits on total dollar amounts and requirements that balances must be repaid annually

Understanding the HOA loan approval process

Once a community association decides to pursue financing, the application process can be straightforward. For example, First Citizens requires a minimum of 25 units, an effective collection policy and up-to-date financials.

In this video, Barnett describes what banks look for when assessing a community's financial readiness.

When processing an application, banks typically review the HOA's income statement, balance sheet and aging report. Depending on the association's governing documents and state laws, a board vote or amended HOA declaration may also be required.

The bottom line

In this video, Barnett explains how early conversations with a financing partner can make a difference.

Discussing your HOA's needs with an association banking professional can help you quickly determine what may be an effective option for your situation.