How to Select the Right Type of Church Loan for Reconstruction

Churches fall under a specific type of commercial real estate. Hence, many churches seldom deal with institutional loans. However, there are many local banks and credit unions having expertise in church lending. Here are different church financing options for reconstruction.

Understanding Different Types of Church Loans

Mortgage Loans

The mortgage loan is typical for large projects. These loans are more than $75,000. The current facilities and the land is kept as collateral in mortgage loans.  There are two types of mortgage loans- short term mortgage and long term mortgage.

  • Short-Term Mortgage– It has a variable interest rate and short-term. The interest rates depend on national rates. This can lead to inconsistent payments. However, short term mortgage loans allow the borrower to pay off the loan quickly.
  • Long-Term Mortgage– It is a fixed interest rate loan with a long term of repayment. Long term mortgage loans give the borrower an advantage of predictable payment. However, a long term mortgage can have a potentially costly payment schedule due to the interest factor.

Unsecured Church Loans

An unsecured church loan is ideal for equipment upgrades or small renovations. These loans are smaller than mortgage loans.

The right type of loan is determined by the funds you require for the church renovation or reconstruction. If the amount required is more than $50,000, a mortgage loan is the best option. You are free to choose between short term mortgage or long-term mortgage depending on the repayment capacity. Here are given some critical questions to ask when shopping for church financing.

Borrowing Potential

When it comes to borrowing, the lender will assess your borrowing potential. A church loan is different from a home loan, where a person’s borrowing potential is judged by his/her income.  When it comes to commercial lending, factors are evaluated differently. One of the questions that they would like you to answer is can the property generates sufficient revenue to cover a portion of the debt.  If you seek a loan to reconstruct a church, the lender would want to know how the church’s income will grow with this new investment.

Look for Lower Interest Rates

Many lenders offer fixed rate short term loans. This ensures the rates will not go up during the entire loan tenure. You need to ask for lower interest rates when shopping for a church loan. Church lending adds a layer of complexity to lenders.

Unlike other loans, lenders cannot assume ownership of the property, which can be turned in if the borrower defaults on payment. Hence, the lender might ask for a down payment of anywhere from 10 – 30% to reduce the risks in church lending. If you have cash in hand, it is a great thing.

The down payment can come from different sources, like equity in your current facility. Some lenders might agree for lower interest rates after reduced risks in lending.

These are tips that can be useful when shopping for a church loan. You need to approach banks and commercial lenders who have a history of church financing. Instead of being consultative, they are strictly transactional and are interested in selling a financial product (loan) to you.