When a major repair costs more than the association has on hand, there are three ways to pay: spend reserves, levy a special assessment, or take out a bank loan and repay it from assessments over time. Reserves are the cheapest when they exist. A special assessment avoids interest but asks owners for a lump sum. A loan spreads the cost over years at the price of interest and fees. Many projects end up using a mix of all three.
The three options at a glance
| Factor | Reserves | Special assessment | Bank loan |
|---|---|---|---|
| What it is | Money already collected for major components | A one-time charge to every owner, due at once or in installments | Money borrowed by the association and repaid from assessments |
| Speed | Immediate, if funded | Weeks to months (notice, any member vote, collection) | Often several months (application, underwriting, any member vote) |
| Extra cost | None, but spent reserves must be rebuilt | No interest; some collection cost | Interest, loan fees and legal review |
| Who bears it | Past and current owners who funded reserves | Whoever owns on the due dates | Whoever owns during the repayment years |
| Main risk | Draining funds meant for other components | Hardship and delinquencies | Long-term debt and higher assessments for years |
| Best fit | The repair is a reserve component and the fund is healthy | Shortfall is modest or owners can absorb it | Large, urgent project and owners cannot pay a lump sum |
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Option 1: Use reserves
Reserves exist for exactly this purpose: roofs, paving, siding, plumbing and the other major components listed in the reserve study. If the repair is one of those components and the money is there, use it.
The trap is spending the roof money on the plumbing. If the fund covers this project but leaves nothing for the next one, the board has only moved the shortfall. Before committing reserves, ask the reserve specialist to update the funding plan with the project included. Our guide to HOA reserve studies explains how to read that plan.
Option 2: Levy a special assessment
A special assessment is a charge on top of regular assessments, divided among owners by the formula in the governing documents. It can be due in one payment or spread over several months.
- Advantages. No interest and no debt. The project is paid for and finished.
- Drawbacks. Owners on fixed incomes may not have the cash. Delinquencies can rise, and the association may be short on the day the contractor needs to be paid. Large assessments often need a member vote.
- Ways to soften it. Offer an installment schedule, give as much notice as possible, and explain what owners can do individually, such as a home equity loan.
Option 3: Take out an HOA loan
Banks that work with community associations make loans for capital repairs. The general pattern:
- The association is the borrower. Individual owners do not sign and the loan does not appear on their personal credit.
- The collateral is the income stream. The association pledges its right to collect assessments. The bank does not take a mortgage on the buildings or on individual homes.
- The bank underwrites the association. Expect questions about delinquency rates, reserve balances, the share of units that are rented, the budget and the governing documents.
- Repayment comes from owners. The loan payment is funded by higher regular assessments or by a special assessment paid in installments over the loan term.
- Terms vary. Rates, fees, the length of the loan and any prepayment charge depend on the lender and the association’s finances. Get proposals from more than one bank.
The advantage is time: the work gets done now and each owner pays a manageable monthly amount. The costs are interest, loan covenants that can limit the board’s flexibility, and debt that stays on the association’s books until it is paid off.
Combining them
Many projects use a blend. Common combinations:
- Reserves plus a smaller special assessment. Reserves cover the portion already funded and owners make up the gap.
- Loan with a payoff option. The board approves a special assessment that owners can pay in full up front or in monthly installments. The loan covers those who choose installments.
- Loan plus a higher reserve contribution. So the association is not back in the same position when the next component fails.
How to decide
- Pin down the real cost. Get a defined scope of work and competitive bids, and include a contingency. See how to hire a contractor.
- Ask how urgent it is. A safety hazard or active water intrusion narrows the choices. A project that can wait two years can be funded with gradual increases.
- Update the reserve plan. See what reserves can contribute without starving other components.
- Read the governing documents. Look for borrowing authority, limits on special assessments and any member vote requirements.
- Estimate the cost per owner. Show the lump sum and the monthly cost side by side for each option.
- Listen to owners. Hold a meeting or survey before the decision is final.
- Get professional review. The attorney for authority and vote requirements, and the CPA or reserve specialist for the numbers.
Effect on owners and home sales
Both a pending special assessment and an association loan are typically disclosed to buyers and lenders. Mortgage lenders commonly ask the association about them through a questionnaire, and a large unpaid assessment is often negotiated between buyer and seller at closing. A loan raises regular assessments, which buyers also weigh. Neither is necessarily worse for sales than the alternative: deferred repairs and a thin reserve fund are red flags too. See selling a home in an HOA.
Communicating the decision
Owners accept a large bill more readily when they can see the reasoning. Share the inspection report or bids, the options the board considered, the per-owner cost of each and the timeline. Put the discussion on an open meeting agenda and record the vote and the reasons in the minutes.
In California
The Davis-Stirling Act sets limits on assessments and on borrowing from reserves. It does not contain one general rule on bank loans, so the governing documents matter a great deal.
- Special assessment limit. Under Civil Code section 5605, the board may not impose special assessments that in the aggregate exceed 5 percent of the association’s budgeted gross expenses for the fiscal year without approval of a majority of a quorum of members. For this vote, a quorum means more than 50 percent of the members. The same section caps regular assessment increases at 20 percent over the prior year without that approval.
- Emergency exception. Civil Code section 5610 lifts those limits for an extraordinary expense required by a court order, one needed to address a threat to personal health or safety discovered on the property, or one for repair or maintenance that the board could not reasonably have foreseen when it prepared the budget. For the last category, the board must pass a resolution with written findings and distribute it to members with the notice of assessment.
- Notice of the assessment. Civil Code section 5615 requires individual notice to members of any increase in regular or special assessments not less than 30 nor more than 60 days before it becomes due.
- Borrowing from reserves. Civil Code section 5510 limits reserve spending to repair, restoration, replacement or maintenance of the major components the fund was established for, and related litigation. Civil Code section 5515 allows a temporary transfer of reserve money to the operating fund for short-term cash needs or other expenses, with conditions. The board must give notice of its intent in a board meeting notice, stating the reasons, some options for repayment and whether a special assessment may be considered. It must make a written finding in the minutes explaining the need and how and when the money will be repaid. The funds must be restored within one year, unless the board, after the same notice, makes a documented finding that a temporary delay is in the best interests of the development. If necessary, the board must levy a special assessment to repay the reserves, subject to the section 5605 limit.
- Bank loans. Civil Code section 5735 allows an association to pledge its right to collect assessments to a licensed lender as security for a loan. Whether the board can borrow on its own, and how much, usually turns on the CC&Rs (covenants, conditions and restrictions) and bylaws. Many require member approval to borrow above a set amount or to pledge assessments. If the loan will be repaid through a special assessment or an assessment increase above the section 5605 limits, the member vote for that assessment is needed as well. Have the attorney confirm both before signing.
- Utility outages. Civil Code section 4775 has a narrow exception. When the association must restore interrupted gas, heat, water or electrical service and reserves are insufficient, it may obtain competitive financing without a member vote and levy an emergency assessment to repay the loan, after the board adopts written findings.
- Loan disclosure. Civil Code section 5300 requires the annual budget report to state whether the association has any outstanding loans with an original term of more than one year, including the payee, interest rate, amount outstanding, annual payment and when the loan is scheduled to be retired.
- Reserve summary. The disclosure form in Civil Code section 5570 must accompany the budget report. It lists approved special assessments and shows the percent funded now and projected over the next five years.
Reserve rules are also tightening. AB 2050, signed in 2026, adds minimum reserve funding requirements that are scheduled to begin in 2032. Ask your reserve specialist and attorney how it will affect your funding plan.
Frequently asked questions
Does an HOA loan put a lien on my home?
Typically no. The lender’s security is the association’s assessment income, not individual homes. An owner who does not pay assessments can still face the association’s normal collection process.
Can owners pay their share of a loan up front?
Often yes, if the board structures it that way. Ask before the loan is finalized, because the loan amount depends on how many owners prepay.
For budgeting, reserves and collections, visit the HOA finances hub. Boards that want help comparing bids and financing proposals can compare management options.
The Law Behind This Article
Every legal point in this article comes from the official text. Each link below opens it in a new tab.
Civil Code sections: 4775 · 5300 · 5510 · 5515 · 5570 · 5605 · 5610 · 5615 · 5735
This article is general educational information, not legal or financial advice. Laws vary by state and your association’s governing documents control many of these questions, so check with your association’s attorney or another qualified professional about your situation.