Religious organizations must take extra steps to get financing

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Ask a Lender
January 24, 2018


Key Points

Things to consider when financing a religious organization

  • Most religious organizations are tax exempt, so lack some financial documents lenders rely on
  • Most lenders will determine the organization’s income with three years’ profit-and-loss statements
  • Other required documents may include attendance records, operating budgets, balance sheets, property appraisals and debt balances
  • Purchasing an existing building is often more affordable than constructing a new one
  • Faith-based lenders may be familiar with your scenario, but be wary of affinity scams

Financing for nonprofit religious organizations – such as churches, synagogues and temples, as well as religious schools, day cares or other facilities – is different from financing for-profit businesses and organizations. Religious organizations are often tax-exempt, rely on donations, and face a host of other challenges to successful financing. It’s important for religious organizations to know how lenders document their income and ability to repay a loan, and to find a lender that understands the challenges inherent in these types of organizations and who is willing to work with them.

Church lending guidelines

It can be difficult to obtain financing to buy or construct a religious facility. There are many reasons for this, but one of the primary reasons is because the organization’s income often comes from tithes and donations, and that can be difficult for a lender to nail down.

For this reason, lenders require ample documentation before approving a loan. Lenders want to see evidence that the church has been operating for a number of years, and has the attendance numbers and accompanying donations to pay back a loan. Lenders also want to know about any existing debt, and any assets the church may be able to use as collateral.

For-profit businesses provide lenders with tax returns to prove income, but that’s not an option for tax-exempt religious organizations. Instead, religious organizations provide lenders with profit-and-loss statements (often referred to as income statements) for at least the previous two years, though most lenders will want to see three years’ worth. Other documentation lenders may request include:

  • Attendance records
  • Operating budgets
  • Balance sheets
  • Current market appraisal of any buildings or property
  • Current debt balances

Typically, churches can borrow about four times their gross tithes and offerings, although some lenders may allow churches to borrow up to six times their tithes.

Purchase vs. construction

Religious organizations looking for their first buildings, or looking to move into a bigger or newer building, must decide whether they want to purchase an existing facility, or build a brand new one.

Purchasing an existing facility is generally less expensive than constructing a new one, even when accounting for the cost of renovations. Renovations also take less time to complete than constructing a new building, and there’s less governmental red tape to wade through.

On the other hand, constructing a building from scratch gives your congregation the opportunity to thoroughly tailor the building to fit its needs. If you decide to go the construction route, here are some things you need to consider to obtain financing:

Document income

You will need to document your church’s income, just as if you were purchasing an existing building.

Select a builder

You’ll need to find a builder who can take on the task of building your church’s new building. Don’t just accept the first contractor who says they’ll do the job, however. Compare builders and find the one that can get the job done well for the best price — check their references and make sure they’re licensed and bonded.

Select a lender

Find a lender that has experience financing new construction[SW1]  of churches or other religious facilities.

Select loan terms

If possible, try to get locked into a fixed-rate mortgage with a long loan term — such as 30 years. With a longer loan term, your organization’s monthly payment will be lower, although it may end up paying more money in interest over the life of the loan.

Selecting a lender

Large banks and lending institutions may be reluctant to lend to religious organizations due to the challenge of determining their ability to pay back the loan. But such organizations may have better luck appealing to faith-based lenders that specialize in working with their particular faith community.

Such faith-based lenders may have a better understanding of how religious organizations operate, giving them a better understanding of their ability to repay a loan. That increases the chances a loan will be approved. Keep in mind, however, that just because a lender presents itself as faith-based, under U.S. federal law, lenders cannot discriminate against borrowers based on their religion or other protected statuses.

Don’t blindly trust a lender just because it purports to share your religious beliefs, either. The Federal Trade Commission says borrowers should watch out for “affinity scams,” in which scammers pose as members of a religious or ethnic community to gain a borrower’s trust, then leverage that trust to defraud them.

Other scenarios

Some religious beliefs preclude the use of traditional, interest-based financing. In these situations, some lenders have interest-free programs that can be used to purchase property. Many of these loan programs operate what is essentially a rent-to-own model, where the lender purchases a home, and the borrower lives in it, paying rent to the lender until they earn enough equity to call the home their own. Some faith-based lenders offer similar loans for commercial real estate transactions.

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