What is a construction loan budget and how is it used?

A construction loan budget is an itemised estimate of all costs expected to be incurred during a construction project. It is used to determine the amount of financing that will be required.

Typically, a construction loan budget will include:

• Cost of building materials such as wood, concrete, metals, fixtures
• Labour costs related to all aspects of construction and site preparation
• Fees for professionals such as architects, engineers, project managers
• Permitting and utility connection fees
• Insurance costs
• Contingencies for unforeseen expenses, usually 10-20% of total budget

An applicant works with their architect and general contractor to prepare a detailed construction budget before applying for financing.

Once financing is secured, the approved budget serves as a spending guide for loan disbursements during construction. An applicant submits documentation showing that the budgeted work has been completed per the draw schedule. The loan provider releases funds in increments as the work progresses.

Adhering closely to the pre-approved budget is essential for finishing the project with the loan amount borrowed.