Every time a church begins to think about expanding its facilities, a formidable battle will surely ensue between two giants: needs and means. The Titan means you must be the ultimate winner of this contest if the church is to successfully build new facilities. Therefore, if the church must borrow money to complete the installation it envisions, it is important in the early planning stages of any project to look at the finances and assets of the church (its resources), from a lender’s perspective.
Lenders handle tough numbers and have developed underwriting standards to manage the risk of the loans they make. The credit industry is undergoing changes, so just because you spoke to your banker two years ago and it didn’t seem feasible for you to build at the time, don’t despair. Capital is available to churches for well-conceived projects. In fact, recently, interest rates have dropped and loan repayment terms have been expanded, creating favorable conditions for churches seeking funds to expand their facilities and growing ministries. There are lenders who specialize in church financing and who understand the unique finances and operations of churches.
While rating procedures and formulas will vary from lender to lender, here are some guidelines:
Loan-to-value ratio of assets: Most lenders will loan between 70% and 80% of the appraised value of the completed project, including the land and existing improvements. The new loan amount generally includes the payment of any existing debt. For example, let’s say you currently pay $ 4,000 per month for your land and still owe $ 200,000. The costs of the new building and site development are budgeted (and evaluated) at $ 2,000,000. His land is valued at $ 400,000. Therefore, the total appraised value is $ 2,400,000. The bank is willing to lend 80% of $ 2,400,000, which is $ 1,920,000. With this loan, the bank will pay the balance of the land of $ 200,000, which will leave $ 1,720,000 to cover construction costs. In our example, the construction budget is $ 2,000,000, which means that the church needs a down payment of $ 2,000,000 – $ 1,720,000 = $ 280,000. The church no longer pays $ 4,000 per month for the land, so these funds can now go toward paying the new mortgage. 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 of additional mortgage payment for land and buildings.
Amortization: Church loans can be repaid over a period of 15 to 30 years. Amortization is the calculated amount of equal monthly payments that are needed to pay off the loan within a set 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 repayment term allows the church to borrow more money for the same monthly payment. In this example, if the church can pay $ 14,389 per month, it has the option of borrowing $ 2 million and repaying it in 20 years, or the church could decide to borrow $ 2,400,000 and repaying it in 30 years.
Relationship between loan amount and gross income: Lenders like the ratio to be 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 You must exceed the payment on the proposed new loan 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 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 is in effect. (For example, this could include payments on the current debt that will no longer exist after the new loan is made. The church may even expect a reduction in the costs of utilities and maintenance of the new building.) In addition, the lender will often include Commitments obtained in a capital campaign that will be collected in the next few months.
The amount you can afford to build depends on the loan amount you qualify for, plus any assets you may add to the loan amount. If the church is selling land or buildings, the principal from those sales can be combined with cash in savings accounts and expected cash from pledges to determine how much the church can spend on new facilities.