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## Building a Church: What Can You Afford?

Whenever the church begins to think about expanding its institutions, a terrible battle will ensue between two giants: *requirements* and *tools*. A titan *tools* must be the ultimate winner of this competition if the church is to build new institutions successfully. Therefore, if the church needs to borrow money to complete the site they see, it is important in the initial stages of planning any project to look at the money and the property of the church (its equipment), from the point of view of the lender.

Lenders deal with hard numbers and develop underwriting standards to manage the risk in the loans they make. The lending business is changing, because you talked to your banker two years ago and it seems impossible to build at that time, do not lose hope. Capital is available to churches for well thought out projects. In fact, recently, interest rates have decreased and loan repayment terms have increased, both of which have created favorable conditions for churches seeking funding to expand resources and grow their ministries. There are lenders who specialize in church financing and understand the unique finances and operations of churches.

While guarantee procedures and formulas will vary from one lender to another, here are some guidelines:

**Loan to Asset Value Ratio**: Most lenders will lend 70% to 80% of the estimated cost of the completed project, including the land and existing improvements. A new loan usually involves paying off any existing debt. For example, let’s say you’re currently paying $4,000 a month for your land and still owe $200,000. The new building and site development costs are estimated (and estimated) at $2,000,000. Your land is valued at $400,000. Therefore, the total assessed value is $2,400,000. The bank is willing to lend 80% of $2,400,000, which is $1,920,000. On this loan the bank will pay the balance on the land for $200,000 which will leave $1,720,000 to put toward 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 is no longer paying $4,000 a month for the land, so this money can now be put toward a new mortgage payment. Let’s say the loan is $1,920,000 at 6% for 25 years = $12,370 per month – $4,000 = $8,370 per month for additional mortgage payments on land and buildings.

**Payment: **Home loans can be repaid over a period of 15 to 30 years. Amortization is the calculated amount of equal monthly payments required to repay the loan over a fixed period of time. For example, a $2 million loan, if paid over 20 years at 6% interest would require 240 equal monthly payments of $14,389. The same loan paid 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 $14,389 a month, it can choose to borrow $2 million and pay it back in 20 years, or the church can decide to borrow $2,400,000 and pay it back in 30 years.

**Loan Amount to Gross Income Ratio**: Lenders like a ratio of less than 3 to 1. Therefore, if a church wants to borrow $2,000,000 it must have a net income of approximately $670,000 per year.

**Cash flow **must exceed the proposed new loan by 20%. In other words, the church should have a little money left over at the end of each month after paying the new monthly mortgage payment and all of its other expenses. Your outgoings will include your monthly balance, as well as any payments that will be due after the new loan is in place. (For example, this may include payments on current debt that will not exist after the new loan is made. The church may expect a reduction in the cost of utilities and repairs to the new building.) Further, the lender will often include the church. pledges received from the capital campaign will be collected in the coming months.

How much money you can afford is the loan you should get, as well as any assets you can add to the loan amount. If the church sells land or buildings, the proceeds from those sales can be combined with cash in savings accounts and expected money from pledges to determine how much money the church can afford to spend on new things.

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