What Is a Hard Money Church Loan?
Have you ever tried securing a loan for your church? If you have, you’d have discovered that churches find it harder to get loans than other types of commercial establishments. Churches simply don’t have enough external financing options. Even when they locate a willing church lender, they must jump through several hoops and conditions before securing a loan.
Therefore, Churches often settle for some sources of money they may not ordinarily jump at. One such example of alternative sources of Church financing includes hard money loans. But what is a hard money Church loan? More importantly, should your Church get a hard money loan?
A hard money Church loan differs from all the conventional loan types you may know. Its nature, duration, and conditions for approval are all different. So, in this post, we’ll explain all you need to know about hard money Church loans, including the advantage and disadvantages.
What Is a Hard Money Church Loan?
A hard money loan is a type of credit you can only secure with real property. Such collateral could be a church or fellowship hall or other real estate. Hard money Church loans are loans you take out only as a last resort. This means you should ask a traditional lender for credit and if you are declined then you settle for a hard money church loan.
Another relevant fact about hard money loans is that they are usually short-term. Your Church will have to repay the credit in a shorter window. Notably, this timeframe ranges from one to three years. This is different from traditional Church loans, which you can repay for up to twenty-five years, depending on the terms of your church agreement and the lender.
Furthermore, since hard money loans aren’t traditional, it’s highly unlikely that you’ll get a hard money Church loan from a bank. Instead, you’re more likely to get it from individuals, companies, or private loan institutions. A hard money loan is a faster way to borrow than going through the usual route of conventional Church loans.
How Hard Money Church Loans Work
Now, let’s see how hard money church loans work. It’s vital to understand that the process and qualification of getting a hard money Church loan differs from that of getting a hard money loan. Firstly, the basis for getting a hard money Church loan isn’t generally based on creditworthiness.
Creditworthiness is the extent to which your Church is considered suitable to receive financial credit, often based on its reliability in repaying past loans. When you apply for a hard money loan, the lender does not care about this as much as a traditional lender.
Instead, hard money lenders are more concerned with the value of the collateral you can provide for the loan. Once you have valuable collateral, you’ll most likely get the hard money loan even if you have a terrible credit rating.
Hard money lending is a high-risk venture. The lender is taking a chance that you’ll repay the loan amount despite any existing poor credit rating. However, they will not hesitate to sell your collateral if you default. Interestingly, hard money loans are popular in the real estate industry.
Here, the party may want to get a loan quickly, renovate the property it has used as collateral and resell to offset the loan. So, your church can also do something similar to this. However, since you are probably going to occupy the building, you must take active steps to repay the loan from income from the Church.
Finally, the cost of getting a hard money loan is high. Your Church may have to pay higher origination fees and interest rate on the loan amount. This is because the lender is taking on significant risk by granting the loan and doing so quickly.
Advantages of a Hard Money Church Loan
So, you’ve read all we’ve explained above about hard money Church loans. So, why exactly should your Church consider this type of external financing? Are there any merits to getting a hard money loan? Let’s see.
Fast Money When You Need It
The most significant advantage of hard money Church loans is how fast you can get the money. Hard money lenders will give you a loan faster than any bank you’ll ever work with. Therefore, it’s great for Churches that need cash urgently.
For example, suppose your Church building was damaged after a storm. Then, you have to repair your building and resume services as soon as possible. But if you don’t immediately have the funds, you’ll need to get a loan. Unfortunately, if you don’t have another venue, you cannot afford to wait for traditional loans from banks and other financial institutions.
Hard money Church lenders can help you here. As long as they can quickly verify the value of your collateral, you can get the money you need. You can also access this quick cash if your Church is behind on mortgage payments and need to offset these debts quickly.
Shorter and Faster Approval Process
Getting a traditional loan from a bank or other financial institution is long and tedious. You must apply for the loan, and the bank will request documentation that you must submit. You’ll then have to wait for the bank’s reply. Often, the bank may require additional information and documents from your church before granting the loan.
All these processes increase the time it’ll take to get a loan. Fortunately, the case is different with hard money loans. Since the loan is based on the value of your collateral, the most critical step is proving the value of the property you want to use as collateral. Again, all the lender has to do is confirm the value of your property, and you can enter the loan agreement.
More Relaxed Underwriting
Traditional loan applicants must deal with the underwriting process before getting the money they need. Unfortunately, underwriting can significantly increase how long it’ll take to get the money your Church needs. Underwriting involves the lender checking your debts, assets, liabilities, and property details.
The underwriter usually conducts an independent investigation of these pieces of data. But in some cases, you’ll have to submit some documents to ease the process. Thankfully, underwriting isn’t stringent for hard money loans. As a result, you don’t have to undergo these strict processes to get a hard loan.
More Flexibility in the Loan Process
Finally, the summary of all these advantages is that the hard money Church loan application and closing process is very flexible. With this external financing option, your Church can escape the strict rules and regulations that govern traditional loan applications. You only have to ensure that you have collateral that meets the lenders requirements.
Once you do, you can get a hard money Church loan within a few weeks of application. After this, you can focus on applying the money to its purpose while working out the repayment modalities.
Disadvantages of Hard Money Church Loans
Getting a loan quickly and commencing development on your church project shouldn’t be all you consider while applying for a hard money Church loan. Instead, your Church and its leadership should have a balanced approach to hard money loans. You can achieve this by considering the downsides of hard money Church loans.
We discussed the downside to these loan types below.
Difficulty in Getting Collateral Approval
It’s clear that hard money Church loan lenders only accept real property as collateral. However, getting approval for the collateral you wish to secure the loan with is challenging. Firstly, the lender determines the property’s value through an appraisal.
Even if the collateral is valuable enough to meet the loan to value requirements, the lender may still reject your church’s application. There are many reasons for this. Let’s look at a couple.
For example, many lenders don’t like providing financing for special use properties, like churches. This hesitancy results from regulatory and compliance issues that may crop up. Also, lenders don’t want to deal with the stigma of ejecting a place of worship which many see as a pillar of society.
Higher Interest Rates
Interest rates are one of the most critical factors in any loan application. Churches and other loan applicants are usually wary of agreeing to higher interest rates on the principal sum they borrow from the lender. But the typical arrangement is that more extended repayment periods will naturally result in higher interest rates and vice versa for traditional loans.
But, this does not apply for hard money loans, the hallmark of hard money Church loans is short repayment periods, rarely exceeding three years, your church will have to pay higher interest. It’s not unusual to see double-digit interest rates on the loan amount. So, it’ll be best to consider if you can repay the high interest rates when applying for a hard money loan.
Another reason for the high interest rates is that the lenders are taking on significant risk by not considering your creditworthiness. Therefore, they try hedging their risk by increasing the interest rates to reap higher investment returns.
Limited Hard Money Loan Sector Regulation
There’s limited government regulation over hard money loan providers. So, you’ll mainly find private investors and companies in this space. Hard money lenders are thus able to make their own rules and regulations regarding several issues, including:
- Debt-to-income ratios,
- Interest rates,
- Credit ratings, and
- Other loan application requirements.
Some of the rules the lenders make will favor you, such as overlooking lower credit ratings when applying for a loan. However, many other regulations, such as interest rates, may not be fair to you.
This doesn’t mean that you should avoid hard money lenders. Instead, it’ll help to fully understand that the institution you’re applying to for a loan has wide legal latitude for its operations and limited oversight from regulatory authorities.
Risk of Losing Your Collateral
As mentioned, you must put up some property as collateral to get a hard money Church loan. It could be your Church building or other property somewhere. Moreover, a Church member or other person, can offer their property as collateral for the hard money loan.
Unfortunately, whoever puts up this collateral, risks losing it if everything doesn’t go as planned. Indeed, your Church and the lender can negotiate the loan terms. But forfeiting the collateral is often a steady condition of getting the hard money loan. This risk is usually too high for churches, unless the Church is sure that they can meet the repayment requirements before the deadline.
Shorter Repayment Window
The most significant advantage of hard money Church loans doubles as the undoing of the external financing option. Since you can get all the money your Church needs quickly, you must repay the principal and interest within a short time. As we’ve already stated, the repayment period is often between one and three years.
Longer repayment dates are not prevalent. This short period is because of the risk of the loan to the lender. Unfortunately, a short repayment period can significantly stress your Church’s finances, and you’ll have to spend a chunk of your income repaying the loan.
Should Your Church Take a Hard Money Church Loan?
Indeed, there are some disadvantages of hard money Church loans. However, such demerits of this external financing source don’t completely cancel the option. The question of accepting a hard money loan for your Church depends on several factors and the unique circumstances of your Church.
But there are instances where it’s wise to take a hard money Church loan. Firstly, suppose your Church has a pressing need, and no other sources of capital is available. Then, accepting an offer for a hard money loan may be a wise decision.
Other instances where you can take a hard money loan include:
- When your Church is facing threats of foreclosure based on an earlier loan
- Your Church is facing bankruptcy and significant depletion of assets
- The Church urgently needs cash and will have a means of repayment soon
- Where your Church cannot qualify for traditional loans from conventional financial institutions
In all these scenarios, accepting a hard money Church loan may be your only option. This isn’t to say that you should only take a hard loan when you’re pushed to the wall and have no other choice.
Instead, you should evaluate all situations and weigh the gains of taking a hard money loan with potential losses when making a decision. Finally, you can contact us for consulting and guidance before taking out a hard money church loan.
Choosing a Hard Money Church Loan Lender
Again, Churches have it harder when sourcing loans. Even with the higher interest rates and possible unfavorable terms, there’s no guarantee that your Church will get a hard money church loan after applying. Hard money lenders, like private investors companies, don’t jump at lending to Churches. Many of them specifically refuse to lend money to Churches.
Therefore, it’s vital to carefully vet lenders before taking a hard money Church loan from them. You need to know the private lender or company’s lending history. This includes their relationship with churches and how they handle hard money loans.
Many hard money loan institutions operate in a way that increases the chances of borrowers losing their collateral. So, it’ll be best to avoid any lender who engages in such practices. If their process is not transparent, don’t borrow from them.
How to Get a Hard Money Church Loan
Now, let’s see how to get a hard money Church loan. Although the process we’ll explain below is straightforward, you still need an expert to guide you through the application process. So, you can contact us today for guidance.
A hard money loan application will typically go through the following steps:
Every loan commences at the application stage. It’s only the application requirement that differs. You’ll have to submit an application (often written) to the loan agency for hard money loans. Each hard money lender has its procedures for application. You’ll thus have to check with the institution and comply with its rules regarding loan applications.
Vetting and Collateral Evaluation Stage
After applying for the hard loan, you’ll have to submit some details, especially the document of the property you’re putting up as collateral. The lender will then quickly investigate your finances, including your credit standing and other factors.
We already said that hard money lenders don’t put much weight on your creditworthiness. However, many still run these background checks to help them decide whether your church is worth the risk.
After evaluating your finances and Church credit, the lender will have whatever internal meetings are necessary to approve or reject your loan application. It’s noteworthy that the lender can offer you less than you asked. Banks are not the only financial houses that offer lower loan amounts than you applied for. The hard money lender can evaluate your collateral and propose a sum proportionate to your property’s value.
If you accept the lender’s offer, you will move on to other terms of the loan contract, including the repayment modalities. The lender usually draws up the loan contract for your perusal before signing. However, it’s best to always run your contracts by your lawyers before signing. This ensures that you don’t get a bad deal.
Does My Church Qualify for a Hard Money Church Loan?
This is a pretty straightforward question. When you apply for a loan with traditional banks, they’ll run your application through multiple conditions before determining your eligibility for a church loan. Your Church will have to pass the:
- Creditworthiness test
- Proof of income and capacity to repay the loan
- History of the Church
You’ll also have to submit several other documents for evaluation by the bank. But you can still go through all these processes and not qualify for a church loan. However, since such strict regulations are absent in the hard loan industry, you can easily qualify for a loan once you have valuable collateral.
Moreover, hard money Church loans are very customizable. This means that you can adapt the loan to your Church’s specific needs. It doesn’t matter what you first applied for; you can always get a counteroffer from the lender. So, to answer the question, your Church will qualify for a hard money loan if your proposed collateral can sufficiently cover the loan amount your church is requesting for.
Now you know all you need to know about a hard money Church loan. So, you understand what you must do to get a hard money Church loan. You can always opt for this source of external financing if all other loan attempts prove unattainable. But it’s best to confirm that this is the best move for your church.
Fortunately for your church, we can help you make a good hard money loan decision. All you have to do is reach out to us today. You can also read other insightful materials on Church loans from our blog.