Residential Construction Budget
 The
most important concept to get right in a construction project is its
budget. Most of us try and use our experience with purchase money
mortgage loans and use a simple calculation that goes something like
this: Lot costs X dollars and construction costs are Y Dollars,
therefore the total cost is X+Y and since I am putting so many dollars
down then the balance is the construction loan.
The
reality is far from that simple calculation. The first thing to
remember is the fact that construction takes time, and when it comes
to loans, time is defiantly money. If it takes you 12 months to build,
then you have 12 months of interest to pay, typically charged on the
amount you have actually borrowed at any one time.
Unlike
a purchase money transaction,
construction loans include the
closing costs in the total acquisition. These include but are not
limited to items such as origination fees, title insurance, lender
fees, closing agent, insurance and recording fees to name the basic
charges.
Last
but not least, there is the concept of “Contingency Reserve”. This is
a reserve amount normally calculated at 5% of the total hard cost of
construction. It sits there to cover unexpected cost over runs. This
is also cost that needs to be added to the project cost.
Remodeling
construction loans are calculated using this method also.
In
summery the total cost of the project consists of:
Soft
costs, consisting of: Architectural, engineering, survey, permits,
school taxes, utility connection fees and any other fees inured before
the actual construction can begin.
Hard
cost of construction, which is basically the actual cost of building.
Closing costs, including all the costs
associated with closing of construction loans.
Interest
reserve, normally calculated as 60 to 70% of annual simple interest of
the total loan amount.
Contingency
reserve, which is based on 5% of the hard cost of construction.
Lot
value, is the present value of the property if owned less than a year
or acquisition cost, if owned less than a year.
Inspection
fees, which are paid to the inspectors who inspect the progress of the
project.
Construction
loans are typically made, based on Loan to Value (LTV) and Loan to
Cost (LTC) consideration, where LTV is the obtained by dividing the
loan amount by the future value of the house and LTC is calculated by
dividing the loan amount by the total cost.
Guidelines
for construction loans vary and depend on the loan amount and other
credit considerations.
At
Construction Loan Center we use a number of spread sheets to calculate
loan amounts depending on the particulars of project, however we are
currently working on a generic calculator that will put on the site to
assist our borrowers.
This
simple
mortgage calculator can be help by calculating your
mortgage payments.
Questions?
Call us Toll Free
or Send an Email,
with any questions or concerns that you may have. Visit Our
State Specific Contact Page,
where you can find our phone numbers to call us, contact us by email
or complete our short, secure application form.
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