To calculate how much construction loan you can afford, you need to consider several key factors, including your income, expenses, credit profile, and the loan terms.
Here’s a general breakdown:
Key Inputs for a Construction Loan Affordability Calculator:
- Monthly Income: Total gross income (before taxes) for you and co-borrowers.
- Debt-to-Income Ratio (DTI):
- Generally, lenders prefer a DTI below 43%.
- This includes existing debts like credit cards, car loans, and other mortgages.
- Loan Interest Rate: The estimated rate for your construction loan.
- Loan Term: Typical terms are 12–18 months for construction loans.
- Down Payment: Construction loans often require a 20–25% down payment.
- Estimated Property Value: The projected value of the completed property.
- Available Savings: To cover any shortfall in construction costs.
Steps to Calculate:
- Determine Your Budget:
- Use 28% of your gross monthly income as a guide for your total housing costs (mortgage, insurance, taxes).
- Example: If your gross monthly income is $5,000, you can afford $1,400/month in housing costs.
- Factor in Existing Debt:
- Total debt payments, including the new construction loan, should stay below 43% of your income.
- Example: If your monthly income is $5,000, total debt payments should not exceed $2,150.
- Estimate Loan Amount:
- Input the interest rate and loan term into a loan calculator to estimate monthly payments.
- Account for Extra Costs:
- Construction loans often have additional costs, such as inspection fees, closing costs, and contingency reserves.