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Lender Cost Breakdowns for Custom Homes

How to Prepare a Cost Breakdown for a Construction Loan

Financing a custom home build requires the use of a construction lender. I’ll be demonstrating the use of a cost breakdown in this episode so make sure you click on the video to get a good visual and understanding. This will help you prepare what a lender needs to process your construction loan application.

In the video I use an actual cost breakdown that we submitted to a lender. We call this a lender cost breakdown. In the cost breakdown we break our costs out into 3 columns: Build Costs, Soft Costs, and Site Costs.

Distinguishing Build Costs for Custom Homes

A build cost is basically a hard cost to build a home. Build costs have nothing to do with permits, fees, or any other items that are not on the actual site being used to construct the home. Build costs do also exclude the site costs, which are improvements to the land which are necessary to complete before the actual build begins. The build costs will vary greatly depending on your location. If you are here in Middleton, Idaho your build costs could be 20% to 30% lower than the building costs in say Ramona, CA.

Soft Costs for Construction Expenses

The soft costs include more than just permits and fees. Soft costs include Title 24 related expenses, water and sewer fees, and other costs related to the construction that are not actual material or labor.

Land Site Costs in Middleton

Site costs include items that improve the property and prepare the site for the construction of the structure. Expenses such as grading or installation of underground utilities make up site costs. Long concrete or asphalt driveways can be lumped in here as well. Remember to include your BMPs for soils management and. We include the solar material and installation costs here, but solar could go under the build costs column if you want.

Cost Breakdown Prepaids for Custom Homes

All of these lines calculate across the board, and then they total at the bottom of this sheet. At the bottom, we include additional lines to calculate contingencies, supervision, overhead, and profit. Our bottom line number on this sheet sums to $793,175. Many of the soft costs occur before funding occurs with the lender. These pre-paid costs include plans, design efforts, consulting fees, and other pre-funding costs and fees that are paid up front. Since these costs occur before funding, the bank calls these prepaids. Construction prepaids count towards your down payment. Therefore, if the loan requires twenty percent down, say $200,000, and $50,000 were spent on your pre-construction costs, then the $50,000 in prepaids would reduce your out of pocket cash to $150,000.

This cost breakdown helps the lender identify what is in the green column of this document. Separating these columns as such helps us explain what these pre-paid costs amount to, which the lender also cares about. In this particular example, the lender will look at the total cost of $793,000 and reduce the owner’s down payment by $26,567, which they prepaid on the front end for this project. 

Initiating the Loan Draws

The lender also evaluates the draw amounts for the project. From the builder’s standpoint, the initial draw reduces based on the received prepaids. Say the lender schedules a 10% initial draw off the $793,000, then the initial draw equals $79,317. When 10% of the overall contract amount goes out on the initial draw, the builder deducts the $26,567 off of that draw amount, and the leftover amount will deposit into the contractor’s account. This gives the lender a great picture of what payments the builder has already received as well as what funds the builder will need to be paid. This cost breakdown example shows the payments already paid for the Letter-of-Intent, a portion of plans and utilities fees, among other items. The remaining unpaid balance will fund within the first draw of closing this loan. 

Some of these items have been partially paid for, which is ok. This cost breakdown is set up to clearly identify to the lender what remaining balances exist for each line time. This will help identify which funds still need to cover any pre-construction costs that have not been billed. After the initial draw, an additional 7-9 different payments throughout the project. Our draws typically occur at the start of grading, or start of foundation, framing, drywall, and so forth.

When to Submit a Lender Packet

Now if you plan to finance your land as part of the construction loan, you will need to assemble a cost breakdown before the land purchase. The property will be part of the budget you submit with your lender package since you’ll be using lender funds to close on the loan. If you already own the land and you’re getting ready to build you simply have to produce this to dispense the funds that are specified in the builder agreement. The lender package includes the building agreement, the cost breakdown, and the list of specifications, and a floor plan. Those are the items that we include.

Lender Cost Breakdowns for New Custom Homes

I hope this provides understanding on what is what and how a lender views the cost breakdown. It’s a great tool for identifying construction prepaids so the lender can recognize what he needs to reduce from the first draw amount, which in turn allows them to get that loan ready to fund. 

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