A loan officer from your bank or credit union looks carefully at your financial statements when deciding whether to give your church a loan for construction or to refinance your existing loan. A variety of numbers will be pulled from the financial statements and compared to other numbers. What does the loan officer look at?
I will discuss this in a series of posts. I’ll describe the ratios, how they are calculated, and give an illustration.
My comments are based on talking to lenders over many years. Every time I go to the Christian Leadership Alliance conference, I make a point to stop by and visit all of the lenders in the exhibit hall. I usually ask about their lending criteria.
At the 2011 CLA conference, I visited with three of the big lenders to the church community. Here is my composite description of what they consider.
There are typically three ratios a lender will look at: debt coverage ratio, loan-to-value, debt to income.
Here is the shorthand version for any finance readers in the audience: DCR from 1.0 to 1.25, LTV 70%, debt:income 3x.
Here is the description in English instead of in the foreign language spoken in the far-off land of Finance:
Debt coverage ratio – this is the amount of income that is available to make the loan payments compared to the amount of those payments. Lenders want to make sure that churches will be able to afford the loan payments on a cash flow basis. Will there be enough cash to cover the loan? A perfectly reasonable concern.
The range of ratios that I heard this year ranged from 1.0 up to 1.25. Over the past many years I’ve usually heard numbers in that range as well.
Loan-to-value – this is the amount of cushion the lender has if they have to take the property back. In other words. if they get the property, will they be able to sell it for more than the loan balance?
This is usually expressed as the amount of the loan divided by the market value of the property. Complicating this calculation is figuring out the market value. In the last three or four years market values of all buildings have dropped dramatically. This is where the appraisal comes into play.
The calculation: you take the amount of the loan and divide by the appraised value of the property. Lenders want to see a ratio of 70%. This means that in order to get a $1,400,000 loan, the property needs to be worth $2,000,000. That gives you a 70% ratio. That gives them some cushion – they could take back property worth 2 million, discounted it a bit, pay for a commission and closing costs, and still have cushion to recover their loan and past due interest.
Debt to income – this is the amount of debt compared to the amount of total revenue. Typically lenders will want to see debt no higher than three times revenue. This means if you have $1,500,000 of total revenue, consisting of contributions and program revenue (things like retreats, special events, high school camps, and stuff) then the maximum loan would be $4,500,000. That’s a ratio of 3 to 1.
Next post: audit or reviewed financial statements?