Construction & Renovation
Cost Overruns and Change Orders on a Construction Loan
How change orders are approved on a construction loan, who pays for overages, how contingency reserves work and what to do when the budget runs past the loan.
Updated 2026-08-21| Applies to: Borrowers and builders managing budget changes mid build.
The short answer
Any change to the approved scope or budget goes through a written change order that the lender reviews before the related draw funds. If a change increases cost, it is paid from the contingency reserve if one exists, from your own funds, or in limited cases from an approved loan increase. Work performed without an approved change order can hold up a draw.
The change order process
- 1.Builder documents the change, the cost and the schedule impact
- 2.Borrower signs the change order
- 3.Lender reviews and updates the budget and draw schedule
- 4.Funding source is identified: contingency, borrower funds or an approved increase
- 5.Work proceeds and the revised line item is inspected at the next draw
Where overruns come from
| Source | Typical fix |
|---|---|
| Allowance overages on finishes | Price real selections before closing |
| Site conditions found after excavation | Carry a contingency and get a soil report early |
| Material price movement | Lock pricing or order long lead items early |
| Owner requested upgrades | Fund from cash, not from the contingency reserve |
| Municipal requirements discovered at inspection | Confirm code requirements with the building department up front |
Protect the contingency
A contingency reserve exists for the unknown, not for upgrades. Spending it on a nicer kitchen in month two leaves nothing for a drainage problem in month five. Treat upgrades as out of pocket.
If the budget exceeds the loan
- Bring cash to cover the difference, documented and sourced like any other funds
- Value engineer the remaining scope with the builder
- Request a loan increase, which requires re underwriting and often a new appraisal, and is not guaranteed
General education, not a commitment to lend. Construction, land and renovation program terms, loan to value limits, draw procedures and builder requirements vary by lender, property and current guidelines, and they change over time. Manny Oloyede | Mortgage Broker | NMLS 1824463 | Ultimate Mortgage Brokers LLC. Equal Housing Opportunity.
Common mistakes to avoid
- Verbal agreements with the builder that never reach the lender
- Spending the contingency on upgrades
- Assuming the loan amount can simply be raised later
Frequently Asked Questions
People also ask
Do I make payments during construction?
On most one time close programs you pay interest only on the funds drawn to date, then the full payment begins after conversion.
Read: One Time Close Construction LoansDo I close twice?
Not with a one time close construction to permanent loan. You close once, and the loan converts at completion. A two time close structure has a separate construction loan and a separate permanent refinance, with two sets of closing costs.
Read: Construction to Permanent Loans ExplainedWhich is cheaper overall?
Usually the one time close, because you pay closing costs and title work once instead of twice. The exact difference depends on loan size and the fees on each structure.
Read: One Time Close vs Two Time Close Construction LoansHow long does a draw take to fund?
Commonly a few business days from request to funding once the inspection is scheduled and lien waivers are in. Timelines are not guaranteed and depend on the inspector and title company.
Read: How Construction Loan Draws WorkHow much should my contingency be?
Many builders and lenders plan a contingency in the range of five to ten percent of hard costs. Larger custom projects and older lots with unknown site conditions justify the higher end.
Read: How to Finance a Custom Home BuildCan I use land equity as my down payment?
Often yes. Land owned free and clear commonly counts toward equity in the construction project, subject to program rules and the appraised lot value.
Read: Land Loans vs Construction LoansTerms used in this guide
- Draw Schedule
- The stage by stage plan for releasing construction funds as work is completed and inspected, built from the project's line item budget.
- Cash to Close
- The total funds you must bring to closing: down payment plus closing costs and prepaids, minus credits and your earnest money deposit.
Written by
Manny Oloyede, Mortgage Broker
NMLS #1824463 | Ultimate Mortgage Brokers LLC NMLS #2619461 | Licensed in OH | KY | NC | PA | SC | TN | TX
I have worked in mortgage lending since 2018 out of the Akron / Cuyahoga Falls Branch, helping buyers, homeowners and investors across Northeast Ohio and every state where I am licensed. These guides reflect the questions I answer most often, written the way I would explain them on a call.
Keep reading
How Construction Loan Draws Work
How construction draws are requested, inspected and funded, how the draw schedule is built from the budget, and what causes a draw to be delayed.
Construction & RenovationConstruction Loan Down Payment and Loan to Value
How construction lenders set the down payment using loan to value and loan to cost, how owned land counts as equity, and how occupancy changes the limits.
Construction & RenovationBuilder Requirements for Construction Loans
What lenders review before approving your builder: licensing, insurance, experience, references, financial capacity and the construction contract itself.
Construction & RenovationHow Construction Loan Appraisals Work
How an appraiser values a home that has not been built, what plans and specs must include, what happens if value comes in low, and the final inspection at completion.
Questions about your own numbers?
Send over your goal, income type and timeline and you'll get a straight answer on what is realistic.