Understanding the Qualifying Metrics for a Community Association Loan

Understanding the Qualifying Metrics for a Community Association Loan

Author: Luis Alicea, Director of Community Association Banking

Securing a community association loan is a critical step for Homeowner Associations (HOAs), Condominium Associations, and Co-Operatives (Co-Ops) in financing capital improvements, repairing communal areas, or refinancing existing debts.

Qualifying for such a loan involves navigating the key metrics lenders use to evaluate the eligibility and terms of a loan. These metrics, which include unit count minimum, loan amount, term, loan to value, delinquencies, rentals, assessment increase, single owner concentration, multiple owner concentration, and the deposit relationship, serve as a crucial criterion in the assessment process, indicating the community's financial stability and the likelihood of loan approval.

This article aims to clarify these metrics and introduce the importance of the deposit relationship in the loan qualification process.

Unit Count Minimum

The unit count minimum refers to the fewest number of units required for a community to qualify for a loan, highlighting the lender's need to assess the community's scale and stability. A larger unit count suggests a diversified income source and can reduce the perceived loan risk.

Loan Amount

This is the total sum the community aims to borrow and is determined based on the association's reserves, annual budget, and overall financial health. Then lender uses the information to evaluate whether the requested amount is within the community's repayment capacity.

Loan Term

The term of the loan indicates the repayment period, which can vary from 3 to 15 years, with 20 years considered on an exception basis. The choice of term affects the monthly payment size and total interest cost, with shorter terms typically leading to higher monthly payments but lower total interest.

Loan to Value (LTV)

In the context of community association loans, LTV ratio is adapted to measure affordability rather than being directly linked to property values. This approach assesses whether the loan amount is sustainable based on the association's budget, reserves, and income, focusing on the community's ability to manage and repay the loan.

Delinquencies

Delinquency rates are a critical factor, with high rates potentially indicating association financial or management issues. Lenders may require a delinquency rate below a certain threshold to qualify for a loan.

Unit Rentals

The ratio of rented units within the community can impact loan qualification, with lenders preferring a lower percentage of rentals. This metric assesses the stability and upkeep of the community because owner-occupied units are often better maintained.

Assessment Increase

Plans for an assessment increase to cover loan repayments indicate proactive financial management and may positively influence lenders by demonstrating a clear strategy for loan repayment.

Single and Multiple Owner Concentration

These metrics examine the risk associated with the ownership concentration. High single owner volume can pose a risk, while a diversified ownership structure (multiple owner concentration) is generally viewed as less risky.

Deposit Relationship

The deposit relationship metric assesses the community association's banking relationships with the lender, emphasizing the significance of operating or reserve accounts held with the financial institution. This relationship can be a critical factor in the loan qualification process because it can provide the lender with a clearer view of the association's financial practices and stability. Maintaining an operating account or reserve account with the lender fosters a sense of partnership and trust between the association and the financial institution. Lenders may offer more favorable terms or consider a more flexible approach in evaluating other metrics for associations that demonstrate a strong deposit relationship.

Qualifying for a community association loan requires a comprehensive understanding of the metrics involved, including the essential consideration of a deposit relationship. Each metric provides insight into the financial health and stability of the community, playing a crucial role in determining loan eligibility and terms. By carefully evaluating and optimizing these metrics, community associations can enhance their chances of securing the necessary financing to support their goals and ensure the community's long-term prosperity.

Learn about FNBO’s community association loans or connect with an industry expert.

About the Author
Luis collaborates with community, homeowners and condominium associations, as well as community association management companies, to support capital and funding needs. He understands that every organization has different financial goals and builds deep relationships with his clients to offer the right solutions at the right time.