A construction financing budget needs to provide a considerable amount of detail if its going to help you secure a construction loan for your project.  Failure to provide a proper budget and cash flow can get your application for financing declined.

Here are some things to consider when going through the budgeting exercise.

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First, make sure that your efforts to prepare a detailed spending budget is for your benefit more so than a lender’s.  By taking this approach, you will also be creating something of value for a source of financing.  Too often, borrowers will create a budget and disbursement schedule for the lender without making sure that it actually makes sense, destroying some of their credibility in the process.

Second, detail out all costs by construction phase. For each expenditure, identify when the cost will be incurred and when the related payment will have to be made.  Construction lenders will make disbursements after completion of each phase of construction.  You may need to consult your construction mortgage specialist to make sure you have your project broken down in the phases acceptable to the lender you’re applying to.

Third, build in a contingency plan of at least 10% of the total project costs.  Unexpected costs occur more often than not and recognition of this will make your budget and cash flow more credible in the eyes of the lender.  Remember that this whole process is for your benefit as well, so try to be as realistic as possible.  Convincing yourself that everything will cost less or that you’re going to be able to negotiate down your costs from trades people and suppliers will put your project in a less favorable light due to the higher risks of potential budget overruns.

Fourth, review your budget and cash flow with your construction mortgage broker prior to presenting it to a lender.  This is a good opportunity to identify any weak or missing areas that can be improved prior to lender review.

Fifth, be realistic in terms of both your estimates of cost and timing.  Lenders like to see a certain amount of realism in the project as they are presented far too often with ultra aggressive construction plans that tend end up having problems which could otherwise have been avoided through better planning.

Remember that your construction financing budget is not only a report that the lender reviews to see if all the costs are included and that the projected financing funds are sufficient.  Its also a reflection on how well the project has been thought out and organized to the point of the financing application.   A lack of detail or omission of key costs elements or a lack of any contingency can cause a lender to decline the application as they don’t want to get involved in projects that are not well set up for success from the start.

If you need any help developing your construction finance budget, give me a call and we’ll work through the details together.

Click Here To Get In Touch With Construction Loan Specialist Joe Walsh

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