What are church loans? Regulations, requirements and financing options

What is a church loan?

A church loan is any financing that a religious or faith-based organization (including Christian, Jewish, Muslim, or other religious groups) takes out. It’s not one specific type of loan, but an umbrella term covering several loan products. Common uses for church loans include property purchases, renovations, and funding day-to-day operations.

Repayment structures depend on the type of church loan:

• Term loans follow a payment schedule, normally with monthly payments. They may have fixed monthly payments for the entire term or a larger balloon payment at the end.
• Revolving lines of credit typically have interest-only payments and can be reused as the balance is paid down.
• Church construction loans normally have a construction phase with interest-only payments and convert to a term loan at the end of the construction phase.

During the application process, the lender evaluates the church’s income. Income sources vary depending on the church, but may include tithes and offerings, tuition, and rent earned from event bookings.

Can churches get business loans and mortgages?

Churches can take out business loans and mortgages, but they face unique challenges. They typically have variable income, making them harder to underwrite. Lenders may also be reluctant to accept church buildings as collateral on a loan, as it’s complicated to resell this type of property if the church defaults.

Most churches are nonprofit organizations, which rules out certain loan options already. Some traditional lenders don’t work with nonprofits, and only for-profit businesses are eligible for 7(a) loans and 504 loans from the Small Business Administration (SBA). Many church loans are considered commercial transactions and may not include the same consumer protections (such as those under the Truth in Lending Act), depending on how the loan is structured.

Here are the options available to churches:

• Commercial real estate lending: A church can get a commercial real estate loan, known in this case as a church mortgage, to purchase property or refinance an existing loan. The property secures the loan.
• Nonprofit lending: Community Development Financial Institutions (CDFIs) are lenders that specialize in serving nonprofits. They can be a more accessible option for church loans, although they generally charge higher interest rates than banks. Nonprofit loan funds are another option designed to service nonprofits, and these tend to have lower rates than CDFIs.
• Specialized church lenders: Since these lenders focus on church lending, the application process is smoother and easier than with a traditional bank.

Lenders often require personal guarantees for business loans. This can be another hurdle, as churches need members both willing to guarantee a loan and with strong enough finances to meet the lender’s requirements. However, there are church-focused lenders that don’t require a personal guarantee.

Does a church need nonprofit documentation to borrow?

Yes, and churches need to provide more documentation than a traditional small business applicant. Lenders typically ask for the following from churches:

• Employer identification number (EIN).
• Articles of incorporation and bylaws.
• Leadership roster.
• A board resolution authorizing the loan and meeting minutes.
• Property documentation for a church mortgage or church construction loan.

Documentation is especially important for new churches. Having the required documentation helps demonstrate that a church is a credible organization, even if it doesn’t have much financial history yet.

Types of church financing options

Different types of church loans are available to fit different needs. The table below covers most options and how they work. Loan terms, eligibility requirements, and approval criteria vary significantly by lender and borrower profile.

Church mortgage loans

A church mortgage is a commercial real estate loan used to buy property or refinance an existing loan. Churches can also get a cash-out refinance if they want to turn equity into cash.

Mortgage terms normally range from 10 to 30 years, and there are two common loan structures. Fully-amortizing church mortgages spread payments evenly across the entire term. Mortgages with balloon payments end with a large lump-sum payment. Fully-amortizing mortgages are safer because the required payment doesn’t balloon at the end.

Lenders usually require three years of financial statements and may also request three years of attendance records. Here’s an idea of what lenders look for:

• Loan-to-value (LTV) ratio of 65% to 80%, requiring a down payment of 20% to 35%.
• Total debt no higher than four to six times gross income from tithes and offerings.
• A debt service coverage ratio of at least 120%, meaning net income is at least 20% more than debt payments.
• Revenue and attendance growth for the past three years.

Lenders conduct a commercial appraisal of the property being used as collateral. Valuations for church buildings are normally conservative, especially for special-purpose buildings, such as sanctuaries and baptisteries. These types of buildings have a limited group of buyers, which negatively impacts their resale value.

Church construction and renovation loans

Church construction and renovation loans can fund a variety of projects, including houses of worship, landscaping, daycares, and schools. This is a more complex type of financing than a mortgage. The lender approves a total loan amount, but instead of paying it all out upfront, the church draws against that amount in stages as the project demands.

The church makes interest-only payments during construction, and only on the amount borrowed–not the full loan. Upon completion of the project, the church starts paying back the loan principal. Churches previously had to get two separate loans for this: a construction loan first, and then a church mortgage to refinance the loan.

Nowadays, many lenders offer a more straightforward takeout loan with construction-to-permanent financing. This type of loan starts as a construction loan and converts to permanent financing once the project is finished, eliminating the need to apply for a second loan.

Church lines of credit for cash flow

A business line of credit gives a church flexible borrowing power. The lender approves a maximum credit limit, and the church can withdraw up to that amount. The church only pays interest on the amount that it borrows.

As the church pays down the balance, its available credit increases. For example, if a church has a $100,000 line of credit and withdraws $60,000, it has $40,000 in available credit left. If it then makes a $10,000 payment, its available credit would increase to $50,000.

Since church lines of credit provide ongoing access to funds, they work well for unpredictable expenses. They can also help cover cash flow gaps, which are a common issue for churches. Most churches have seasonal income that peaks during Christmas and Easter. Churches can draw from a line of credit during slow periods and pay it back during high-income months.

Bridge loans and short-term financing

Bridge loans provide funding for major expenses while a church waits for other financing or capital. The most common example is when there’s a timing gap between buying one property and selling another. Churches often need to close on new properties before selling their old properties. A bridge loan provides short-term financing for the purchase, and the church can then pay back the bridge loan after its old property sells.

Since bridge loans are fast, they also work well for time-sensitive purchases when a lengthy underwriting process could mean losing a deal. And they can help churches cover costs during relocations.

Equipment and vehicle financing

Churches sometimes need financing for equipment and vehicles, such as vans, buses, and AV equipment. With this type of financing, the equipment serves as the collateral.

The application and approval process is often easier for equipment financing than for church real estate lending because of the difference in collateral. Repossessing and selling equipment or a vehicle is a straightforward process, and there’s a sizable market of buyers. It doesn’t present the same challenges as church real estate.

Denominational loan funds and faith-based financing

Denominational loan funds and faith-based financing provide loans tailored to churches. A denominational loan fund is an internal lending program available to affiliated churches in a religious denomination. Mission-aligned lenders provide faith-based financing to churches that don’t have access to a denominational fund.

These financing options offer several advantages over traditional small business lending. They have a more church-specific underwriting process, which helps churches qualify for loans. The terms are often better than what churches could get elsewhere. Denominational loan funds and faith-based financing also normally doesn’t require a personal guarantee, a significant hurdle for churches that apply for financing through a traditional lender.

Church loan requirements and documents lenders ask for

Lenders require proof of a church’s legal structure, finances, and governance during the loan process. You’ll likely need to provide articles of incorporation and a certificate of good standing to show your church’s status with the state, three years of financial statements, and attendance and giving records.

To check governance, lenders normally ask for the church constitution, bylaws, and a leadership roster with each person’s role at the church. Lenders will also want to confirm that the church has approved the loan by viewing the board resolution and meeting minutes authorizing the loan request.

Lenders may have additional requirements depending on the type of church loan. For example, a church construction loan could require construction plans and contractor estimates.

The table below provides a checklist of documents needed for most church loans.

How church lenders determine loan size and risk

The main factors that church lenders evaluate to determine loan size are a church’s income and debt load. Also important are the number of giving units, leadership, and growth trajectory.

Some lenders may consider loans of up to four times to six times a church’s gross annual income from tithes and offerings. If a church brings in $250,000 per year, then lenders may cap loan sizes at $1 million to $1.5 million.

To evaluate debt load, lenders often look at a church’s debt service coverage ratio (DSCR). DSCR is a church’s net income divided by its debt obligations. A church with net income of $250,000 per year and debt obligations of $200,000 would have a DSCR of 1.25. Requirements vary widely by lenders but it’s common for lenders to want to see a DSCR of at least 1.2 or 1.25 to show that a church makes enough money to pay its debts.

The number of giving units, a term for each person or household that gives to the church, also plays a role in determining risk. A church that receives most of its income from 10 families presents more risk than one that receives most of its income from 200 families. Its income could drop significantly if it loses any of its main donors.

A stable leadership team with a long-tenured pastor is a plus for lenders, as instability and pastoral transitions can lead to dips in giving. Growth trajectory is another important criteria. A church with growing attendance and giving is safer than one with flat or declining numbers.

How to get a church loan

Here are the steps to get a church loan:

1. Define the purpose, amount, and timeline.
2. Get internal approvals and assemble documents.
3. Compare lenders and term sheets.
4. Go through underwriting, appraisal, and closing.

Step 1: Define the purpose, amount, and timeline

Document the reason your church needs the loan, such as a building purchase, new construction, or cash flow during slow periods. This can help you decide on the right type of church loan, the amount to borrow, and how long of a loan term to get.

Step 2: Get internal approvals and assemble documents

Read the church bylaws to review the exact procedure for authorizing a loan. Then, work with leadership to get the internal approvals needed. Depending on the church and the loan amount, this could mean passing a board resolution or holding a congregational vote.

You’ll also need to assemble the documents for the loan application. Keep records of the loan authorization, such as the board resolution, and work with the church treasurer to gather financial statements for the past three years.

Step 3: Compare lenders and term sheets

Go through the preapproval process with multiple lenders and compare offers. The APR can be a helpful starting point when comparing loans. It provides the total annual cost of a loan, including the interest rate and other fees, so you get an accurate measure of how much each loan costs on a yearly basis. Also look for extra costs, such as a prepayment penalty or a balloon payment at the end of the loan.

Many church lenders impose covenants, which are conditions the church must meet for the life of the loan. For example, the lender may require that the church send it annual financial statements or maintain a certain amount of cash reserves. Consider how strict each loan’s covenants are and whether your church can comply with them.

If you’re applying for a church construction loan, compare draw rules with each lender. Make sure you’ll be able to draw the funds you need on schedule.

Step 4: Go through underwriting, appraisal, and closing

Once you submit a church loan application, the lender conducts its underwriting process. It analyzes your church to decide whether to approve the application and, if so, the loan terms. This process generally takes 30 to 45 days, but missing documentation can cause delays. It’s important to provide the required documents upfront and respond promptly if the lender requests additional documentation.

For church loans tied to property, including church mortgage loans and church construction loans, the next step is an appraisal. The appraisal process normally lasts about three to five weeks. Be prepared to coordinate timing with the appraiser. The faster they can finish their inspection, the faster you can get the loan.

The final stage is closing, where the lender prepares the loan documents, the church’s authorized parties sign for the loan, and the loan is funded. The church representatives who show up to sign loan documents must be the same ones authorized by the board resolution to avoid delays. Loan funding generally takes another 30 to 45 days after underwriting and approval, so the entire church loan process lasts about two to three months.

How much can a church borrow?

In general, a church can borrow up to four to six times its gross income from tithes and offerings. That’s the upper limit, but it doesn’t mean all churches will be able to borrow that much. The loan amount a church can get depends on several factors, including:

• Financials including gross and net income
• Income trends over the last three years
• Number of giving units
• Business credit
• Time in business
• Pastoral tenure and church leadership
• Cash reserves
• Loan-to-value (LTV) ratio for property-secured loans, such as church mortgages
• Which lender you select

For example, let’s say your church’s gross annual income is $500,000. It could potentially qualify for up to $2 million to $3 million in total debt. If it already has a $250,000 loan, then it could likely qualify for up to $1.75 million to $2.75 million.

Church loan rates, fees, and terms

Rates, fees, and terms determine the total cost of a church loan and the payment structure. The interest rate is the yearly cost of borrowing money. Church loans can have either fixed rates that stay the same for the entire loan term or adjustable rates that follow a benchmark index, meaning they can change over time.

Church loans can also carry additional fees, such as:

• Origination fees
• Application fees
• Property appraisal fees
• Legal fees
• Annual service fees
• Prepayment penalties

Loan terms cover how long a loan lasts, how funds are disbursed, and how you repay the loan. For example, a church mortgage may have a 15-year term, with all loan funds disbursed to the church upfront and fixed monthly payments. A church construction loan could last two to three years, with funds disbursed in line with stages of the construction and interest-only payments during the draw period.

Where to find church loans

Church loans are available from banks and credit unions, specialized church lenders and brokers, and denominational funds. Here’s how each option compares.

Banks and credit unions

Banks and credit unions are the traditional place to get a loan, and they can work for church loans, as well. If you go this route, it’s usually a good idea to look at smaller financial institutions, such as regional banks and local credit unions. They tend to be more flexible with lending requirements and more connected to the local community.

If your church has an existing relationship with a bank or credit union, such as a business bank account open there, look to them first. Relationship banking can help quite a bit with qualifying for a loan. The bank already understands your church’s finances, which streamlines the underwriting process. Since you’re a client, the bank may also be more willing to work with your church and provide the financing it needs.

When going to a bank or credit union for a church loan, be prepared to provide three years of financial statements, organization documents (including the articles of incorporation and bylaws), and cost estimates, if you’re borrowing for a specific project.

Specialized church lenders and brokers

Specialized church lenders and brokers are often the most appropriate financing option, because they cater specifically to religious organizations. Their underwriting process is designed to evaluate churches, and they’ve likely issued hundreds or thousands of church loans already, so they can run a more accurate risk assessment than a traditional bank would.

These lenders also tend to be more aligned with a church’s financial needs and goals. They typically don’t require a personal guarantee, which is often a sticking point on church loans. And their objective is to help make a positive impact for churches, not just make a return on the money they lend.

Although church lenders and brokers can be an excellent choice, there are a few tradeoffs to watch out for:

• Some lenders are too small to handle large or complex transactions. For example, a small lender may be able to provide a vehicle loan or a line of credit, but not have enough capital or experience for a sizable construction loan.
• Brokers can help with finding a loan but also complicate the process. When you work with a broker, you add another party to the transaction instead of working directly with a lender.
• They don’t always have the lowest rates. Church lenders usually have competitive rates, but in some cases, there could be better deals available from a conventional lender.

Denominational funds and mission-aligned lenders

If your church is part of a denomination, see if it can borrow from a denominational fund. A denominational fund is a nonprofit organization within a religious denomination. Members of the denomination, including its churches and their churchgoers, can contribute to the fund and earn a return on their money.

The denominational fund then lends money to churches in the denomination. Loans issued by denominational funds may have a smoother application process and better terms, because both the borrower and the lender are part of the same religious community.

Mission-aligned lenders work similarly to denominational funds, except they’re available to nondenominational churches. Two of the most popular options are BCLC Church Lending and CDF Capital.

What can a church loan be used for?

Churches can use loans for a variety of financial needs, including:

• Property purchases
• New construction
• Renovations and remodels
• Working capital for everyday expenses
• Refinancing debt
• Equipment and vehicle financing
• Bridge financing

How to pay off or refinance church loans early

Paying off church loans early can save you money on interest, but it takes careful financial planning and disciplined management. Before you consider it, confirm that your church loan doesn’t have a prepayment penalty. If it does, an early payoff may cost you more than you save.

If you decide to pay off your church loan early, the most straightforward approach is committing to a larger monthly payment. Figure out an amount your church can afford during strong giving periods and seasonal dips. A consistent monthly payment makes budgeting easier than a variable amount that you adjust for every change in income.

An early payoff is only worthwhile if you can do it without disrupting operations. It’s not a good idea if it means neglecting other obligations, such as postponing facility maintenance, or dipping into cash reserves.The standard rule of thumb is to maintain three to six months of operating expenses, and you shouldn’t use that money to pay extra on a church loan.

Another option is refinancing your church loan, where you replace your existing loan with a new one. Refinancing could make sense if:

• You want to pay off your loan early. You could refinance to a shorter term and reduce your payoff timeline.
• You qualify for a lower interest rate. If your church has cheaper loan options available now, refinancing is a way to take advantage.
• Your loan has a balloon payment. Refinancing could help you avoid a much larger payment.

Alternatives to church loans

Debt isn’t always the best fit. Some churches are better off with other funding options, either alone or as a complement to a church loan. Here are a few alternatives to consider:

• Capital campaigns and pledge drives: Your church runs a fundraising initiative for a project. A capital campaign can work well on its own or in combination with a church loan. For example, if you’re planning to get a church mortgage, you could use a capital campaign to raise money for the down payment or to pay for a portion of the new property.
• Grants: Federal, state, and local governments offer grants for nonprofits that support community services. Churches that provide these kinds of services, such as afterschool programs or food pantries, may be able to qualify for grants.
• Shared space or leasing strategies: Instead of financing a new location, a church could look for a shared space arrangement. This involves multiple churches sharing the same space to reduce costs, with each having certain days and times when it can use the space. A church can also lease a facility, avoiding a mortgage application and the cost of buying.
• Phased renovation approach: Also known as scope staging, phased renovation allows churches to finance expensive projects that exceed their borrowing limits. The church breaks the project into phases, and then finances each phase individually. If a project is estimated to cost $3 million, and the church can borrow up to $1 million, it would finance the first phase instead of the entire project. Once it’s able to borrow more, it would finance the next phase, and so on.

Nav is not a lender. We help business owners understand and compare financing options.

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