What is an underlying mortgage?

An underlying mortgage is a loan the HOA itself takes out, usually when a major repair, a roof, elevator, or concrete restoration project, costs more than reserves can cover and a special assessment big enough to close the gap would hit residents too hard. What secures the loan isn’t the clubhouse or the pool, it’s the association’s right to collect assessments from unit owners.

Why does an underlying mortgage matter?

Financing a big project instead of phasing it can save money, though the figures below are illustrative of one community’s experience rather than a result every association should expect to match: one community spread a $2.2 million repaving and roofing project over seven years to avoid raising assessments, then found phasing was going to cost half a million more in inflation and remobilization fees than just taking a loan and doing the work all at once. The tradeoff is that the community locks itself into loan payments that have to be built into every future budget, whether or not something else breaks in the meantime.

When You’ll Run Into This

This becomes a serious conversation the moment a major repair’s price tag is bigger than reserves can absorb without help. Our guide to what boards need to know before calling a bank covers what to weigh before taking this route.