When you're building a home, renovation or addition, it's important to include contingency funds within your budget. These funds provide a safety net for unexpected expenses that could otherwise derail your project schedule and exceed its original cost estimate. They are designed to cover the kinds of unforeseen challenges that can occur during construction, such as weather delays, material cost increases and changes in the scope or plan of work by the builder.

The amount of a contingency fund will vary, depending on the lender, but most will require that some percentage of a construction loan be dedicated to this reserve. This reserve is typically disbursed in stages, based on completion of milestones set in the project's construction timeline. These milestones may include passing inspections, obtaining permits and meeting deadlines for completing the construction phase of the project.

It's also important to understand that construction financing, Florida are a different animal than traditional mortgages. In Florida, construction loans are subject to a variety of requirements and timelines that should be familiarized with prior to starting the process. Obtaining a preapproval is one of the first steps that borrowers can take to determine how much financing they'll be able to qualify for, what their interest rates will be and what fees are associated with the construction loan.

Next, borrowers should review and make apples-to-apples comparisons among at least a few lenders to identify the best construction loan terms available for their unique situation. Then, they'll need to submit blueprints, contractor information and financial records to formalize their application for a construction loan. Getting organized can help streamline the process and ensure that all necessary documentation is available to meet any required deadlines.

After a construction loan is approved, the lender and borrower will finalize the terms and establish a draw schedule for disbursements of funds during the construction process. It's important for borrowers to understand how these funds are accessed, and to ensure that their contractors understand the processes involved as well.

During construction, it's also important for borrowers to keep detailed records and adjust their contingency funds as they work through the project's milestones. This will give them more control over how and when these funds are utilized and prevent them from being exhausted prematurely.

In general, a contingency should be equal to around 5% to 10% of a construction project's overall budget. However, a contingency can be smaller or larger depending on the lender, the project and the borrower's ability to assess risk. In the end, a lender should carefully review each construction project and determine an appropriate contingency level on a case-by-case basis to maximize the value of the construction loan program. This is often done by assessing the contractor's qualifications and scrutinizing each contract for detailed plans, budgets and allowances.