WHEN A BANK EVALUATES A LOAN REQUEST, IT USES SOME KEY METRICS TO GAUGE THE CREDIT RISK OF THE ASSOCIATION. THE FOLLOWING ARE SOME FACTORS THAT A BANK MAY CONSIDER DURING THE UNDERWRITING PROCESS.

1.) Delinquency • Number of accounts and total amount of delinquencies.

• Many banks have a maximum rate of 10% for number of units aged 60+ days. • Strong credit – Delinquency rate less than 5%.

2.) Liquidity • Amount of cash in the association’s operating and reserve accounts as a percentage of annual assessments and annual debt service.

• Many banks have a minimum liquidity requirement of 20% of the association’s annual assessments. • Strong credit – Liquidity levels greater than 50% and at least one year of debt service payments.

3.) Size

• More units/homes provide a diversified cash flow stream. 4.) Assessment Increase

• Large increases may cause delinquencies to rise. • Strong credit – Increase of less than 25%.

• If a large increase is necessary, implementing it before applying for the loan can mitigate risk. 5.) Annual Assessments/Market Value

• Annual assessments should not be greater than 10% of the unit value. • Strong credit – Annual assessments less than 2% of market value.

6.) Owner Occupancy and Concentration

• A high % of investors not living in their respective units is considered riskier. • Strong credit – Over 80% owner-occupied; multiple unit owners control less than 10% of the units. • Weak credit – Less than 60% owner-occupied; multiple unit owners control greater than 20% of the units.

7.) Management and Capital Planning

• Strong external professional management company with experience in managing similar projects is desirable. • Professional reserve study that is at least partially funded indicates prudent financial planning.

54 | COMMON INTEREST® • Summer 2019 • A Publication of CAI-Illinois Chapter