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Building a Church: What Can You Afford?
Whenever a church begins to think about expanding its facilities, a formidable battle is sure to ensue between two giants: Needs and Resources. The Titan Resources must be the eventual winner of this competition if the church is to successfully build a new facility. Therefore, if the church needs to borrow money to complete the facility it envisions, it is important in the early planning stages of any project to review the finances and assets of the church ( its resources), from a lender’s point of view.
Lenders deal with hard numbers and have developed underwriting standards to manage risk on the loans they make. The credit industry is changing, so just because you spoke to your banker two years ago and it didn’t seem possible to build at the time, don’t despair. Capital is made available to churches for well-designed projects. In fact, recently interest rates have dropped and loan amortization terms have increased, creating favorable conditions for churches seeking funding for facility expansion and ministry growth. There are lenders who specialize in church financing and who understand the unique finances and operations of churches.
Although qualification procedures and formulas vary from lender to lender, here are some guidelines:
Loan to asset value ratio: Most lenders will lend 70-80% of the appraised value of the completed project, including the land and existing improvements. The new loan amount usually includes repayment 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 development costs for the new building and site are budgeted (and estimated) at $2,000,000. Your land is valued at $400,000. Therefore, the total estimated value is $2,400,000. The bank is ready to lend 80% of $2,400,000, or $1,920,000. On this loan, the bank will repay the land balance of $200,000, leaving $1,720,000 to be spent on 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 applied to 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 additional mortgage payment for 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 installments that are required to repay the loan within a specified time. For example, a $2 million loan, if amortized over 20 years at an interest rate of 6%, 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 amortization period allows the church to borrow more money for the same monthly payment. In this example, if the church can afford to pay $14,389 per month, it has the option of borrowing $2 million and paying it back in 20 years, or the church can decide to borrow $2,400,000. $ and pay it back over 30 years.
Ratio of loan amount to gross income: Lenders like the ratio to be less than 3 to 1. Therefore, if the church wants to borrow $2,000,000, it should have a gross income of about $670,000 per year.
Cash flow expected to exceed the proposed new loan payment by 20%. In other words, the church should have some money 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 is in place. (For example, this may include payments on current debt that will no longer exist after the new loan. The church may even expect reduced utility and maintenance costs in the new building.) pledges obtained during a fundraising campaign that will be collected over the coming months.
How much you can afford to build depends on the loan amount you qualify for, as well as any assets you can add to the loan amount. If the church sells land or buildings, the net value of those sales can be combined with money from savings accounts and money expected from pledges to determine how much the church can afford to spend on new facilities.
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