Association Loans: Avoiding Default

It is not uncommon for an association to take out a loan to fund major repairs or renovations that become necessary in a common interest community. Whether the loan repayment is being funded through an increased monthly/periodic assessment, special assessment or combination of both, there are a few proactive steps that can be taken to avoid a default under the loan.

Most critically, an association needs to ensure that it has an adequate cushion to account for delays in receiving payments and/or non-payments from owners in the community. While the amount of the cushion is discretionary, 10-15% of the total loan amount is typically a good figure. An association can obtain the cushion by commencing the special assessment or increased monthly assessment a few months prior to the first repayment date due on the loan. 

Next, an association should ensure that owner delinquencies are promptly addressed. Taking out a loan during a time of high owner delinquencies (even if the delinquencies are within the acceptable range for loan underwriting purposes) is not normally a smart move. If an association cannot wait to clear up the delinquencies, it should make certain that delinquencies are diligently pursued both prior to the loan funding and during the repayment period to ensure that there are adequate funds to pay the loan installments as they come due.

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