One of the most commonly asked questions I get from my clients relates to what interest rate they will get on their church loan. Often time’s churches see the interest rates quoted by their local banks and believe that this is the interest rate which will be available to them regardless of their respective financial position, the scope of the project, or the requested loan terms. Although Christian loan lenders set the range of rates, based on economic and market conditions as well as company specific requirements, the church itself, by virtue of the financial characteristics of the church loan and the requested loan terms, is the major player in determining the exact rate which will be available for their financing needs. Specifically, there are two primary financial ratios which a church can use to determine whether they will be on the high-end or low-end of the rate spectrum offered by Christian loan lenders.

The first ratio, and often the most important, is the “times income ratio” defined as the total loan amount divided by the churches annual gross income from tithes and offerings. To make it easy there are two types of Christian loan lenders, those that will provide a church loan for up to three (3) times a churches gross annual income and those that will go up to four (4) times the churches gross annual income. As a church loan moves farther from the three (3) times income requirement the church can expect their available interest rate to continue to increase as well. For instance, a church that has $100,000 in tithes and offerings would be better positioned for a lower interest rate (and fewer points for that matter) when applying for a $300,000 church loan opposed to a $400,000 church loan.

The next ratio is one of the most widely used underwriting factors across all lending arenas and is known as the “loan-to-value (LTV) ratio.” The LTV can be determined by dividing the total loan amount by the collateral (or property) value which will be secured by the church loan. Christian loan lenders will typically provide a church loan for between 70% and 75% of the total collateral value. Just as with the “times income” ratio there are typically two buckets of Christian loan lenders, those that will provide a church loan for 70% of  the collateral value and those that will provide a church loan for 75% of the collateral value. Those churches which are able to keep their LTV under 70%, while still meeting the three (3) times income test discussed above, should expect some of the best rates available in the church lending market.

Another factor, which plays a role in determining the interest rate on a church loan, is the specific loan terms requested by the church. Typically, the shorter the time frame of the loan, or that the interest rate is fixed, the lower the available rate. Christian loan lenders generally structure church loans in one of three ways.  The first way is to offer a 3, 5, 7, or 10 year balloon with payments based on a 20 to 30 year amortization schedule. If such is the case the church will get the best rate on the church loan by requesting the 3 year balloon and should expect the interest rate to accelerate the longer the balloon and amortization schedule. The second structure is to offer a 20, 25, or 30 year loan with a quarterly, annual, or 5 or 7 year rate evaluation. These rates will generally be a little higher then what will be available through a balloon type structure as the church avoids the expenses of refinancing when the balloon comes due. The interest rates on the afore mentioned can be expected to increase the longer the evaluation period. The final  way, and one that is very difficult to find among Christian loan lenders, is to offer a 20 to 30 year fixed rate mortgage. The interest rates on these long-term fixed rate mortgages will generally be significantly higher then those otherwise available in the industry. Furthermore, I do not recommend the latter for any church as a church loan is not a home loan and with appropriate stewardship churches generally will pay off debt within 5 to 7 years.

Although there are many factors which determine the exact interest rate offered by Christian loan lenders the above analysis provides valuable insight into what a church should expect when seeking financing for their vision. Obviously, every situation is unique and every church has a different vision which will require a distinct structure to meet their needs. For further information on current rates and available loan packages for your church please visit my website at www.churchfirstfinancial.org.