How to Shop for a Church Loan

There are a lot of reasons why churches might consider getting a loan. Sometimes growth puts churches in a position that requires expanding their existing sanctuary or moving into a new building entirely. Sometimes it is just time to upgrade and improve areas in your existing facility. Or it could be that it is time to refinance some existing debt to enable you to free up more money for ministry.

When it comes time to look into options, churches are not always sure where to start. Should you just go down and talk to your local bank? What kind of preparation goes into a securing a loan? What documents will you need?

Hopefully, we can answer some of those questions here.

What is a Church Loan?

First off, it is probably a good idea to wrap your mind around commercial lending. A lot of pastors’ experience with lending stops at securing a personal mortgage. Getting a loan for a church is not the same as buying a house. When it comes to acquiring a loan, lenders look at churches as commercial organizations. There are a number of differences between personal and commercial lending. Here are the biggest:

1. Borrowing potential

When it comes to how much you can borrow, your potential is calculated differently for a church than an individual. If you are coming in for a loan to buy a home, a bank will look at your gross income vs. the amount of debt you owe. If your debt eats up too much of your personal income, it is hard for them to justify the loan.

When it comes to commercial lending (particularly on new property), lenders evaluate things a little differently. One of the questions they want to answer is whether the property will generate enough revenue to cover a portion of the debt. If you are considering a loan to purchase a building that just became available, your lender will want you to demonstrate how your church’s income will grow with this new real estate investment.

2. Assumed risk

For the lender, commercial lending is riskier than private lending. Not only is there more money at stake, but if a store owner finds himself in financial straits, they will often put all their resources toward paying their personal mortgage over staying up-to-date on commercial payments. This makes commercial lending a little more precarious.

Church lending adds another layer of complexity for lenders. Commercial properties can be a challenge to sell. If the lender needs to assume ownership on a property in default, a lender wants to be confident that they can turn that property over and make a return on their investment. Due to their unique and very specific features, churches can make it a challenge for a lender to resell. This makes some lenders extra wary of church loans.

Since lenders are putting more at risk, commercial lending often requires a lot more money upfront. In the right market with good credit and strong negotiation skills, it is not too difficult for someone to get into a new house with $0 down, but that is not going to happen with a commercial loan. Depending on the market, lenders can require a down payment of anywhere from 10–30%.

This down payment can come from multiple sources. If you have the cash on hand, that is great. However, it can also come from the equity in your current facility or a capital campaign.

3. Length of payment

The typical residential mortgage has a 30-year term, but there is a lot of leeway. Terms are often negotiated anywhere between 15–40 years—or longer! Which is typically not the case with commercial lending.

Commercial lending terms are typically much shorter. Your term (the length of time you are committed to a mortgage rate and conditions set out by the lender) can be anywhere from 3–10 years. However, the amortization (the length of time if takes you to pay off the debt) may still be considerably longer.

Where Should My Church Go for a Loan?

While it is true that a lender sees your church more as a commercial enterprise than a residential one, your church is not a business. There are definitely unique attributes for churches. It is not a great idea to put your church in the position of taking out a loan with a lender that does not fully appreciate all of the things that make churches special.

Sure, your church has an income, budget, and many considerations of other businesses, but it is not the same. You do not run your church for a profit. The structure is entirely different. While most lending institutions understand that on some level, they might not really get it—which can end up costing you.

Banks and commercial lenders that do not have a history of dealing with church loans often end up shoe-horning churches into one-size-fits-all loans. Instead of being collaborative and consultative, they are strictly transactional. Loans are merely a product they want to sell you. Their goal is not to help you facilitate God’s call or ensure that life-changing ministry is happening.

Find Someone Who Understands What You Want to Do

Many organizations are seeking to serve the church through lending. If you are in the market for a lender, it is smart to start there. They not only understand the nuances of church lending, but they are usually committed to it because they are passionate about ministry too.

Typically, lenders that understand ministry and are committed to serving churches understand that every church is different and color-by-number loans do not always meet their needs. You want someone who understands your mission and objectives and wants to meet your ministry needs.

Find Someone Who Shares Your Values

On top of finding an entity that understands your church’s unique needs, it is smart to think about where the interest you pay is going. The profit that many lenders make off of loans is used to offer new loans. Banking institutions can take the interest you pay on your loan, turn around and give it to another business or organization with a vision that runs counter to your own.

It is smart to think about going with a lender that specializes in church loans. Their interests are often going to be aligned with your own, and that is one less thing to worry about. Also, how great is it to think that the money an organization might make off of your interest would be used to secure loans for other churches?!

What Documentation Is Needed for a Church Loan?

Different lenders approach things a little differently, but here some things that are wise to have available when you sit down with your chosen lender.

  • Your current weekly attendance: How many are showing up to church for every service? If you can demonstrate growth here, that is even better. Along with this information, think about other facts that will give an outsider a clearer vision of what is going on at your church. This could include things like:
    • Membership: We all know that there is a big difference between someone who attends a church and someone who is committed to a specific church’s mission. Membership information helps demonstrate the number of people who are 100% committed to your ministry. Having a couple year’s worth of member information is preferred.
    • Baptisms: This helps give lenders a different view of your growth. Are you reaching new people and adding new believers to your congregation? Baptisms are a way for lenders to gauge growth.
  • A business plan: This does not need to be really in depth.
    • Description of your ministry: This says who you are and what you intend to accomplish. It might include your vision and mission statement. You want the lender to understand who you are and where you are going.
    • How you intend to grow: Say you expand your sanctuary or purchase that old Best Buy building; now what? What strategies are you working on to increase attendance? Do you have a demographic in mind? How will you reach them?
    • How you will use the building: Obviously lenders are mostly concerned with whether or not you will be able to service the debt. You want to demonstrate ways that the property will generate income. That includes showing how you intend to grow your church, but it can also mean demonstrating how you will use the building to create new revenue. Maybe you will use some of the space to start daycare or preschool. Do you intend to open up your sanctuary for community use during the week as a meeting space? How about offering cheap office space for remote workers throughout the week? If you have some ideas for creating extra income with the building, make sure to communicate those.
    • Staffing plans: As your church grows, you will probably add some staff. What positions would you hire to fill and—more importantly—how will they help you grow?
  • Your property value: Do you own the building you are in right now? How about the land? How much do you still owe? How much equity do you have in them? Does your church own any other assets? Maybe you own a local thrift shop or own a building that is being used for a soup kitchen? Present a portfolio with all the church’s assets.
  • Your debts: You will want to give a complete accounting for all your debts and the rates attached to them.
  • Your income: What does your income from tithes and offerings look like? Can you demonstrate stability there? How about growth?

This information will help you get the ball rolling. It is vital to understand that your lender is not just looking for an excel spreadsheet with numbers on it. They want to really understand your church and its unique needs.

As the process develops, they will ask for other documentation. That could (and will likely) include things like:

  • CPA-prepared financial reports: As you go, the lender will start to dig into the details. They will want to see your information going back about 3 years. Many lenders require that an independent accountant prepares these financial statements, and if you do not have them, it can set the process back a number of months. If you are a church with an established history and you are even thinking about the possibility of a loan, it is probably a good idea to invest in some CPA-prepared reports now. Get it out of the way before you start, and when they are needed, you are ready to go. If you are a newer church or a plant that does not have a 3 years’ worth of history, you will need to talk to your lender about the requirements.
  • A current market appraisal of your property: Everyone has an idea of an asset’s worth. The seller and the buyer both have opinions about a property’s value, and both opinions are biased. A current market appraisal is an attempt to get an objective view of a property’s value based on today’s market.
  • Church constitution and bylaws: One of the tricky things about church lending is that the polity of various churches can be so different. Lenders need to understand how decisions are being made in a church. If a resolution is passed to take out a loan, how were they agreed upon? Which individuals in the church are ultimately responsible for making and facilitating financial decisions?
  • A title search: At its most basic level, a title represents the rights on a piece of property. A title search is an act of checking the public record to determine what those rights are and who owns them. This will clearly identify the history of ownership (chain of title), the status of any taxes against the property (tax search), and to ensure there are no unsatisfied judgments, liens, or encumbrances against the property. If you currently own a church property that you are expanding or selling to afford a new building, you will probably need to provide a title search.

Putting Everything in Order

The best way to prepare for a loan is to get all of your information in order. Even if you are entertaining the idea of a loan, it is a smart move to get all of your records together. Look into having an accountant go over all your financial documents and just make sure that everything is in tip-top shape.

Plan on going in with a clear idea of your needs, plans, and goals. Think through everything. The better prepared you are, the more confident lenders will feel.

Most importantly, choose your lender very carefully. It can mean the difference between being just another business transaction or actually dealing with someone who cares about your ministry.

CDF Capital has been focused on church loans since 1953, and we are committed to helping churches overcome the challenges of financial growth projects. We believe in the church—sometimes when no other lender will. If you are interested in learning about how CDF Capital can help you, please contact us today,