It happens much too often. Church members are excited about their new building. The artist’s rendering hangs on the wall for all to see. The architect’s plans are complete. The construction contract is signed. Church leaders apply for a construction loan, confident the groundbreaking is only a few weeks away. Then it happens: They’re turned down, and the whole project is put on hold.

Excitement wanes, some newer members become discouraged and don’t attend as often, and offerings begin to drop off. The growth trend takes a downturn. People want to know why their church was denied.

The truth is, if all churches made their mortgage payments on time, every time, financing wouldn’t be so difficult to obtain. The all-too-common scenario of being denied financing can, however, be avoided if you know what steps need to be taken beforehand.

 

  1. Understand that financial institutions are concerned with risk.

Sadly, about 3 percent of all church leaders who obtain loans will ultimately default on them (i.e., be unable to pay them back). In addition, it’s estimated that 10 percent of all church leaders who borrow money will have problems with late or even missed payments over the loan’s outstanding lifespan.

Whenever a church leader applies for a loan, his or her church’s ability to repay it will be evaluated. The financial institution will study the risk, and if it’s too high will turn it down.

One good habit is to calculate how much a potential monthly payment will be. Put that amount into a monthly savings account for a year or two beforehand. This way, your church has proven it can afford the payment and has documentation to back it up.

 

  1. There’s a limit to how much your church can borrow based upon the value of your property.

When evaluating its risk, a financial institution wants to know that if the church defaults on its mortgage and foreclosure is unavoidable, it can sell the property and get its money back. A good rule of thumb to remember: You probably won’t be able to borrow more than 70 percent of the market value of your property. Have a real estate appraisal done beforehand to establish the value of your church’s collateral.

 

  1. Make sure the monthly mortgage payment won’t strap your overall budget.

Most church leaders know that although building can help a church grow, they – in and of themselves – do not grow a church. Effective ministries that really reach people are much more important. So, if a banker believes a church will have to cut its ministry budget to pay for its new building, the loan request likely will be denied.

A growing church should have a building fund emphasis. This lets leaders accumulate money for a larger down payment, thus requiring less borrowed funds and helping them make mortgage payments when the time comes. Plus, it has the effect of increasing income.

 

  1. Just as individuals must meet certain qualifications to finance a home purchase, churches must meet certain qualifications to build God’s house.

Although now comprehensive, here are some rules of thumb most financial institutions use:

  • Most won’t loan a church more than three times its annual unrestricted income. Such income is money given to the general fund, not for a specific purpose (foreign missions, for example).
  • They won’t loan more than 70 percent loan-to-value. That’s why an appraisal is so important.
  • The monthly mortgage payment shouldn’t exceed 35 percent of a church’s monthly income.

 

One thing every church leader should do before he or she gets too far into a building program is have the board and/or staff sit down with a lender and ask, “What do we have to do to get this loan?” A lot of headaches and heartaches can be avoided this way.

Finally, remember that there’s always more than one lending option. You might have several banks in your community, so ask for their best terms. See if they’ll give you a fixed-rate mortgage and at what percentage.

There are also regional and national lenders available who specialize in lending to churches. Check them out, and then compare.

Do your homework and when loan application time comes, you’ll probably hear those two coveted words: You’re approved.

 

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