A detailed line by line budget is needed for both the appraiser and for the purpose of paying out on the construction loan during construction phase.
A key element to a construction loan is that it is paid out on individual line items (i.e. plumbing or lumber) rather than a total balance overall. For example, if you have a $400,000 construction budget, it’s not a line of credit that you can write checks for until it runs out. Rather, the loan is paid out based on the budget submitted and approved for each line item (i.e. $10,000 for plumbing). When you go over your amount budgeted for each item, you have to cover the difference for that item regardless of how much you have left in the overall budget or if you will have a potential savings on a future item. This is extremely important so you always maintain enough money to complete the project as originally bid and appraised. If at the end of the project you have remaining funds left over you can be reimbursed for earlier funds you have paid into the project along the way, complete additional projects, or to reduce your overall principal loan balance.
By providing a detailed budget, the appraiser will be clear on how much is being spent on each aspect of the project as well as a detail of what is being done and what is not included. This gives you the best chance of a favorable appraised value.
Most importantly, a detailed budget will reduce the delays for draws during the construction phase. When a budget is well put together and complete, it reduces the changes and overruns that can occur during the construction phase. These changes and overruns can cause delays in funding the draws or shorting the draws as well as put financial stress on all parties. Whenever a budget changes after you close, you risk having to bring in additional funds to make up the difference in changes. It is also best to consider adding a contingency to be included within your budget if all possible.
