Numbers a lender looks at when considering a church loan –debt to income ratio

Another thing lenders look at when evaluating whether or not to make a church loan is the ratio of debt to total income.

This calculation looks at the total long-term debt, or the loan that is being considered, and compares that to the total revenue.  This would include contributions and the various program revenue items.  If there is a school, the tuition income would probably be included. 

When I visited with lenders at the 2011 CLA conference, one of the loan officers indicated they would back out any income from a capital campaign for this calculation.  That make sense because the goal is to look at ongoing capacity to cover the loan.

The ratio mentioned by all the lenders I talked to was 3.0.  This means that total debt could not exceed three times the total revenue.  They seem to be more flexible on this ratio, with one saying this ratio isn’t as important as the others.  Several said they might be flexible and go to a ratio of 3.5:1.

Let’s see what this ratio looks like.  I will again use the made up numbers for Example Community Church.  Also assuming the church is trying to refinance an existing loan.

The numbers for this example are found here.

Here’s the calculation:

  • $4,000,000 – total loan
  • $1,500,000 – total revenue
  • Divide loan by total revenue
  • 2.67 – ratio of loan to income

Good news!  The ratios from these fictional financial statements show debt to income less than 3.0.  That would meet the test.

In this example, a loan up to $4.5 million would be acceptable for this specific test.  If the lender were willing to go to a 3.5 ratio, then a loan up to $5.25 million might be allowed.

Let’s change the details a bit in the other direction.  Let’s say that a year ago your income was $1.5 million but because of the recession, the flock at your church got hit hard and had to reduce their giving.  As a result, income dropped by 25% from last year’s amount of $1.5 million, so the current year giving is 1.12 million.  What does the ratio look like now?

  • $4,000,000 – total loan
  • $1,120,000 – total revenue
  • divide loan by total revenue
  • 3.57 – ratio of loan to income

Oops!  That is way above the 3.0 ratio and is even above the 3.5 amount.  Depending on how flexible your lender is, this could either prohibit you from getting the loan or perhaps you could still continue the conversation.

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