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Construction Loan Budget
Construction Loans are calculated based on the two ratios, first of
which is the well understood, Loan to Value Ratio, calculated by
dividing the loan amount by the appraised value of the property. The
seconded ratio is the all important, Loan to Cost Ratio, which is
obtained by dividing the loan amount by the total cost of
construction.
Total cost of construction is obtained by adding all the costs
incurred in the project which include:
Soft costs of construction:
- Including but not limited to; architectural, survey, permits,
local taxes, utility connection fees, and in general all the fees
associated with the architectural, engineering and permit process.
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 landscape in.
Construction loan closing costs:
- All costs associated with closing the loan including but not
limited to: origination fees, lender fees, title insurance, escrow
or attorney fees, property insurance and recording and funding 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.
Interest reserve:
- Is arrived at by calculating 70% of the simple interest on the
total loan amount. This is the reserve that will be making the
payments on the construction loan during construction. In other
words interest is calculated based on the actual amount borrowed at
any one time and applied to the interest reserve account so that the
borrower does not actually make payments during construction.
Contingency reserve:
- Cost over runs cannot be allowed to stop a project, and as such a
contingence reserve is always built into the budget to make sure
that the project will be completed. This contingency is normally
calculated at 5% of the total cost of construction.
Inspection fees:
- Construction lenders disperse funds as the project progresses, and
this is done by regular inspections, which incurs fees.
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