Whenever a church contemplates expanding its facilities, there is bound to be a massive battle between two giants: needs and resources. The titan resources must be the ultimate winner in this competition if the Church is to be successful in building new facilities. Therefore, when the Church must borrow money to complete the facility it envisions, it is important in the early planning stages of a project to look at the Church’s finances and assets (its resources) from a lender’s perspective.
Lenders work with hard numbers and have developed underwriting standards to manage the risk of the loans they make. The credit industry is changing. So don’t despair just because you spoke to your banker two years ago and it didn’t seem feasible for you to build at the time. Capital is available to the churches for well thought-out projects. Indeed, of late, interest rates have fallen and loan repayment terms have been extended, both of which have created favorable conditions for churches seeking funding for facility expansion and growing ministries. There are lenders who specialize in church financing and understand the unique finances and operations of churches.
While qualification procedures and formulas vary from one lender to another, here are some guidelines:
Loan to asset value ratio: Most lenders lend 70% to 80% of the appraised value of the completed project, including the land and existing improvements. The new loan amount usually includes the repayment of any existing debt. For example, let’s say you currently pay $4,000 a month for your country and still owe $200,000. The cost of the new building and site development is estimated (and estimated) at $2,000,000. Her land is valued at $400,000. Therefore, the total estimated value is $2,400,000. The bank is willing to lend 80% of $2,400,000, which equals $1,920,000. From this loan, the bank will pay off the balance of the property of $200,000, leaving $1,720,000 for construction costs. In our example, the construction budget is $2,000,000, which means the church needs a down payment of $2,000,000 – $1,720,000 = $280,000. The church no longer pays $4,000 a month for the land, so those funds can now be used toward the new mortgage payment. Let’s say the loan amount is $1,920,000 at 6% for 25 years = $12,370 per month – $4,000 = $8,370 per month in additional mortgage payment on land and buildings.
amortization: Church loans can be amortized over a period of 15 to 30 years. Amortization is the calculated amount of equal monthly payments required to pay off the loan over a specified period of time. For example, a $2 million loan, amortized over 20 years at 6% interest, would require 240 equal monthly payments of $14,389. The same loan amortized over 30 years would require 360 payments of $11,991. Using a longer payback period allows the church to borrow more money for the same monthly payment. In this example, if the church can afford $14,389 a month, it has a choice of borrowing $2 million and paying it back in 20 years, or the church could choose to borrow $2,400,000 and pay it off over 30 years.
Ratio of loan amount to gross income: Lenders like a ratio of less than 3 to 1. So if the church wants to borrow $2,000,000, it should have gross income of about $670,000 per year.
cash flow should exceed the proposed new loan payment by 20%. In other words, the church should have some money left over at the end of each month after paying the new monthly mortgage payment and all of its other expenses. Your cash flow would include your current monthly cash surplus plus any payments that will no longer exist after the new loan takes effect. (This may include, for example, payments for current debts that no longer exist after the new loan is made. The church may even expect a reduction in utility and maintenance costs in the new building.) In addition, the lender will often involve the community in making commitments , obtained in a capital campaign that will be collected in the coming months.
How much you can afford to build is a function of the loan amount you qualify for plus any assets you can add to the loan amount. When the Church sells land or buildings, equity from those sales can be combined with cash in savings accounts and anticipated cash from mortgages to determine how much the Church can spend on new facilities.