Solving budget problems is very important, since financing the construction of a custom house usually implies resorting to a lender. But the necessary loan amount greatly depends on the costs generated by this process. Consequently, you need to carefully budget your project in order to comply with the loaner’s guidelines. Otherwise, you might be turned down and your plans remain at the stage of an idea. Failing to come up with a clear picture of how much your new home is going to be can create serious difficulties in handling the available financial resources. Unanticipated expenses can entangle you, overthrowing the minutely calculated cost-to-build. Therefore, the article will dedicate its attention to ways of solving budget problems that might occur along the way.
Solving Budget Problems Generated by Landscaping
One of the most common encountered sources of headaches is represented by landscaping (“accessorizing” the property with trees, shrubs or pools) and finish work (applying crown moldings and installing built-in-home theater systems). These two usually take the most time and money to be completed. What is ironic is that they bring the least amount of value to the appraisal, which could challenge the construction loan in terms of:
- time – A standard loan program imposes the establishment of a time frame during which the construction to be carried out. If the borrower exceeds the set “deadline”, the lender is entitled to charge penalties that can reach quite hefty amounts. Therefore, don’t let yourself slowed down at the very last part of the process, because it would be a pity to finish the overall work and get stuck with “petty” matters;
- value- You have to carefully calibrate the efforts exerted in the direction of finish work and landscaping. An investment of $50,000 in this respect adds a maximum of $20,000 to your property’s appraised value. Applying an LTV of 80 percent to this sum, the lender can offer you $16,000 toward the $50,000, which leaves you to complete the difference with $34,000 out of your pocket. Are you really willing to incur these expenses?
In case your budget runs thin, you are advised to keep your finish materials to a minimum. However, you have to make sure that they are at least of the approximately same quality as those used in the houses from the neighborhood so that there won’t be any appraisal problems. Don’t worry about postponing because you can always upgrade and modernize your home later in the build process if you have the necessary cash or the related expenses come in under the budget. Delaying doesn’t necessary mean giving up. If you are truly committed to the idea of investing in extra finish, then keep in mind that it is not about what but when you spend.
Moreover, landscaping can be entirely eliminated from the budget because lenders do not require it for completion. “Equipping” your property with spas, pools or gardens doesn’t render any contribution in terms of dollar-to-dollar value but, instead, it can drag out your project for months. It is better for you to pay these expenditures out of your own pocket after the construction loan is closed.
Another major budget problem may result from the possibility of running out of cash before the completion of the build. Since this is the last thing you want to happen, your cost breakdown must be as realistic as possible or even a little bit overestimated. If the bank is unsure about your budget, it is likely to ask for a higher loan amount or more cash if the option of a bigger loan is not possible.
Overestimating is in your best interest because it allows you to cushion unanticipated costs and also receive extra funds that can be lucratively used for other expenses, such as land reimbursement or upgrades on finish materials. As long as the loan meets the lender’s LTV and LTC guidelines, the overestimation will be accepted.
In conclusion, it is better to engage in a bigger loan program than to run out of money midway through your project. You can protect yourself from unwanted surprises by carefully solving budget problems.