Construction Loan Budget

When purchasing a home or refinancing one the calculations involved are pretty simple to do, but when it comes to calculating the loan amount in a construction loan things get a little more complex.

A construction loan is calculated based on a construction loan budget which will help to calculate the two most important ratios involved in a construction loan, namely the loan to value and the loan to cost.

The loan to value is calculated simply by dividing the loan by the value and the loan to cost is obtained by dividing the loan amount by the total cost of construction, which is obtained from the construction budget.

Total costs of construction are the total of the following items.

Soft costs of construction:
- Include; architectural, Engineering, survey, construction permits, local taxes, utility connection fees, and in general all the fees associated with the things that are done on paper before the actual construction starts.

Hard cost of construction:
- This is the actual cost of construction incurred from the moment the digging begins all the way to laying the floor coverings and putting the landscaping and hardscaping in.

Construction loan closing costs:
- All costs associated with closing the construction loan including but: origination fees, lender fees, title insurance, escrow or attorney fees, property insurance, course of construction insurance, recording, funding and closing fees.

Lot Value:
- Is the value of the lot to be built on or the home that is being remodeled. Normally the current value is used if the property is owned for more than a year or the purchase price is used if owned for less than a year. If there is an existing property that will need to be demolished then the lot value may be the present value of the total property or the empty lot depending on the particular program’s guidelines.

Interest reserve:
- Is arrived at by calculating 60 or 70% of the simple interest on the total construction loan amount. This reserve will be used to make the payments on the construction loan during construction. Interest is calculated based on the actual amount borrowed at any one time and charged against the interest reserve during construction.

Contingency reserve:
- A contingence reserve is always built into the budget to ensure the timely completion of the project despite unforeseen price increases or cost over runs. Contingency reserve is normally calculated at 5% of the total cost of construction.

Inspection fees:
- Construction loans are reimbursement loans and as such, funds are disbursed based on the work completed as verified by an inspector.

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