Some churches belong to large denominations and have access to funds that are lent through Foundations, Endowments, or other types of funding sources. Regardless of its membership, most churches find it extremely difficult to obtain financing from standard banking institutions. This is generally because most standard banks considering church loans to be too risky based solely on the fact that the loan is based on either the stated income or the equity in their real property, if available.
Private Mortgage Companies:
Private mortgage type companies, or private lenders, (sometimes referred to as hard money lenders), are not a part of this discussion. Although, much of the following is applicable to a discussion of loans in general, these private lenders are considered as a secondary or alternative lender market. They are not regulated in the same manner as conventional institutional lenders, as they are considered in simple terms privately operated. This lack of regulation, and accountability, may offer alternatives on several levels for church financing needs and goals.
Church Bonds are also another source of church financing, but are a different kind of funding and topic. Bond funding is not a usual avenue for a huge majority of today’s religious communities and is therefore not a part of this focused article.
Most institutional lenders, such as national or state-chartered banks will rarely arrange loans, or even try to understand a nonprofits repayment income, let alone churches. The basic fact of the matter is that a church has no means of guaranteeing regularly scheduled or calculated income, as it can only show a track record of what it has received in donations, or possibly third-party long term monthly rental income. Additionally, institutional lenders may, and often do, fear the negative publicity they may receive should it become necessary to foreclose on a church or other religious organization.
Types of financing:
- Bridge Loans – Short-term financing used to close a gap; as such a loan to cover the cost of a down payment on a new property which would then be rolled into the secured loan used for the balance of the purchase price. For a church, the institution lender would normally seek some type of security, assignment, or acceptable pledge to secure a Bridge Loan.
- Line of Credit – Revolving loan wherein the barrower has a maximum amount that can be withdrawn with minimum payment; think in terms of a credit card. Also, for a church, the institution lender would normally seek some type of security, assignment, or acceptable pledge to secure a credit line.
- Unsecured Loans – Financing acquired solely based on the credit worthiness of the barrower without collateral; As a church has no credit rating, the loan would be based entirely on the stated income of the church. An unsecured loan for a church should be looked at as probably not obtainable to a church.
- Secured Loans – Financing based on the equity of an asset used as collateral; should the barrower default, the lender my take title/possession of the collateral. This is a standard type loan for a church, but usually such a loan is vastly different from a typical residential or other commercial type loan.
How a loan works:
In theory, the idea of a loan seems simple enough, but the application process is often the easiest part. Understanding the terms and conditions should make you an informed barrower and help insure you are acting in the best interest of your church. In general terms, your monthly loan payment will be fixed for a period of time. Each month, your payment is credited first to the interest which accrued during that month, with the remaining payment being used to reduce the principle amount owned. In other words, if the funds are generally fully amortized over the life of the loan, and your payments will be credited greatly towards interest in the beginning and less so towards the end as the principle is reduced to zero. At the end of the term, your loan will be paid in full.
However, some loans are not fully amortized and a large balloon payment for the balance will be due at the end of the term/length of the loan.
- Principle – The total amount borrowed.
- Interest – Your cost of borrowing the funds; How that interest is computed and applied may be more relevant that the rate itself.
- Annual Percentage Rate (APR) – How much it costs to borrow the funds for the first year, including loan costs and additional fees related to a loan.
- Closing Cost – These can vary, but often include applications fees, brokerage fees, recording fees, notary fees, appraisal fees and insurance.
- Equity – The difference between the market value of the Real Property and the amount owed on it to the lender.
Adjustable Rate Mortgage:
Adjustable rate mortgages are unique in that the interest rate will fluctuate over the life of the loan because the rate is tied to the fluctuation of the interest market. As the rates increase, so to will your monthly payment. Although you may benefit from a lower payment initially, you run the risk of rates increasing to an amount you can no longer afford.
Adjustable rate mortgages will always have a set/timed interest review period, which may or may not adjust the rate, and rates can also be lowered under the terms of the loan adjustment. However, some institutions offer adjustable rate loans which contain “caps” in the amount the rate will adjust in either direction. This way, both you and the lender know the least amount you would pay monthly, as well as the greatest amount you would pay. Additionally, some loans also offer time “caps” in that your rate won’t increase for a set period of time, such as during the first five years.
Fixed Rate Mortgage:
Just as it sounds, the interest rate and monthly payments are fixed over the entire life of the loan, no matter the number of years. This allows a lender and borrower to create a payment schedule with constant payments over the entire life of the loan. This differs from a variable rate mortgage where a borrower has to contend with unknown varying loan payment amounts, that fluctuate with interest rate movements.
Interest only Mortgage:
An adjustable-rate mortgage that allows the borrower to pay just the interest rate for the first few years, or the entire term of the loan. These types of loans can be attractive in that their initially monthly loan payment is lower than that of a conventional loan. In additional, the loan could even be paid off much quicker because any extra amount paid to the lender, during the interest only period, goes directly against the principal.
A word of caution however, unless payments are being made towards the principal, and not just the interest, there may be no equity accruing. In other words, if the property is sold, or additional financing is sought wherein the real property is collateral for both loans, there may not be any equity left in the property, especially after the associated costs of selling.
Rather than seeking financing from an institution, or other source, the current owner of the real property lends the all of the funds, or a portion thereof, necessary for the purchase. However, unlike conventional financing, no funds actually change hands. Rather the Buyer and Seller negotiate mutually agreeable loan terms, and the Buyer gives the Seller a Promissory note rather than the bank.
Although not common in California, the parties can enter into a Land Contract which is similar to an auto loan. Here, the Seller retains Legal Title until the loan has been paid in full, while the Buyer acquires Equitable Title in the land. Once the loan has been paid, the Buyer will then obtain Legal Title to the property, usually in California, via a Grant Deed. The primary drawback here is for the Seller, who will not have the Power of Sale, and the Seller will need to obtain a Court Order to foreclose should the borrower default in the loan payments.
Most commonly, a Seller financed sale in California uses a Deed of Trust, usually referred to as a Mortgage. As with a mortgage from an institutional lender, the Buyer obtains Title through a Grant Deed, but remits monthly payments to the Seller rather than the bank. The primary difference however is that the Seller does not actually put forth the principal for the loan. Instead of the Seller providing the Buyer with any actual funds, the Seller merely extends credit to the Buyer and gets paid the principal and interest every month in return.
A Reconveyance document, which is recorded in the County where the real property is located, usually by the lender, acknowledges that the property used as collateral has been released because the loan has been paid in full. If a reconveyance is not recorded in the public records, by either the lender or the borrower, even though the loan has been repaid, it may still appear on Title and create what is known as a cloud on Title.
A cloud on Title is any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property thereby infringing on the owner’s ability to transfer the property or obtain subsequent loans.
Lenders are generally in the business of making money, not giving it away. Loan packages are created to entice the borrower and decorated with fancy words to sell the borrower. Understand the total cost of the loan over its entire life, not just the cost on a monthly or yearly basis.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.