Short answer: A sources and uses is a one-page statement showing every dollar coming into a project (sources) and every dollar going out (uses), with both columns totaling to the same number. Uses covers acquisition, hard costs, soft costs, financing costs, contingency, and reserves. Sources covers the loan, sponsor equity, and any other capital. If the columns don't tie exactly, the submission gets sent back before anyone underwrites it.
Why this one page carries so much weight
An underwriter looking at your deal for the first time reads the sources and uses before anything else. In sixty seconds it tells them:
- Total project cost and therefore the LTC test
- How much cash the sponsor is actually putting in
- Whether the budget is realistic or wishful
- Whether the sponsor understands their own deal
That last one matters more than sponsors realize. A sources and uses that's missing an interest reserve, has no contingency, or omits closing costs signals someone who hasn't run this play before — regardless of what the track record says. Underwriters make a judgment about you from this page, and it colors everything that follows.
Uses — every dollar out
Acquisition
- Purchase price, or your basis if you already own it
- Acquisition closing costs, transfer taxes, title
If you already own the property, state clearly whether you're using original cost basis or current appraised value, and be prepared to support the appraised figure. This directly affects your equity credit.
Hard costs
Broken out by trade or major category. Not one line reading "Construction — $1,400,000."
Site work, foundation, framing, roofing, windows and doors, exterior, plumbing, electrical, HVAC, insulation, drywall, interior finishes, cabinets and countertops, flooring, appliances, landscaping. A lender's plan-and-cost reviewer is going to compare each of these to regional cost data. A single lump sum tells them nothing and invites a haircut.
Soft costs
Architectural and engineering, permits and municipal fees, survey, environmental, legal, insurance during construction, property taxes during construction, utilities, and a developer fee if you're taking one.
Note on developer fees: many lenders won't recognize a fee paid to yourself or a related entity as an eligible cost. It stays in the budget for your own modeling, but expect it excluded from the LTC calculation. Ask before you build your model around it.
Financing costs
- Origination points
- Lender legal
- Appraisal, plan and cost review, inspections
- Title insurance and recording
- Broker fee if applicable
Interest reserve
A separate line. Sized to your realistic construction schedule plus a cushion — see h
Contingency
5–10% of hard costs on new construction, 10–15% on renovation of older buildings where you don't know what's behind the walls.
Include it. A budget with no contingency line does not read as a lean budget. It reads as an incomplete one, and the lender will add contingency themselves, funded out of your proceeds.
Sources — every dollar in
Senior loan
The requested loan amount. Break out the day-one advance from the construction holdback if the structure warrants it — it makes the closing-table math obvious.
Sponsor equity
Cash you're contributing. Be specific about where it is: a bank statement, a 1031 exchange, proceeds from a sale closing next month. "Sponsor equity — $600,000" with no verification is a conditional approval waiting to happen.
Land equity
If you own the land, this is the credit for it. State your basis clearly and reconcile it to the uses side. Lenders differ on whether they credit cost basis or appraised value, so show your work.
Other capital
Preferred equity, mezzanine, JV partner contributions, seller carryback, subordinate debt.
Two warnings:
Most senior construction lenders prohibit subordinate debt outright. If you're planning a second mortgage or seller note, disclose it at the term sheet stage. Discovering it at title exam is a bad way to lose a closing.
Preferred equity is expensive. A 10% coupon plus a 15% profit share is not a 10% cost of capital. On a project with a $700K profit, a 20% profit participation is $140,000 on top of the coupon. Model the all-in dollars, not the headline rate.
It has to tie
Sources total = Uses total. Exactly.
If uses come to $3,150,000 and sources come to $3,140,000, you have a $10,000 hole and the underwriter will find it. It's the simplest possible check and it's the most common error in submitted packages.
Build it in Excel with live formulas, not typed values. When the appraisal comes in different than expected and your loan amount moves, the whole statement should recalculate and show you the new equity requirement immediately.
Worked example
Project:
Three-family to three-unit condo conversion
Uses
Purchase price → $1,450,000
Acquisition closing costs → $28,000
Hard costs (by trade) → $685,000
Soft costs → $95,000
Financing costs → $72,000
Interest reserve → $148,000
Contingency (8% of hard) → $55,000
Total uses → $2,533,000
Sources
Senior loan (80% LTC) → $2,026,400
Sponsor equity → $506,600
Total sources → $2,533,000
Now test it. As-complete aggregate value of the three units: $3,150,000. Loan of $2,026,400 = 64.3% LTARV. That's inside a typical 70% cap, so LTC binds and the loan holds at $2,026,400.
If the appraisal came back at $2,750,000 instead, the LTARV test caps the loan at $1,925,000 and your equity requirement jumps by roughly $101,000. That's exactly the scenario your model should show you instantly.
What underwriters actually flag
- No contingency. Immediate credibility problem.
- Hard costs as a single line. Reads as an estimate, not a budget.
- Interest reserve missing or obviously light. Suggests an unrealistic schedule.
- Equity that's "coming from a sale." Needs a signed P&S and a closing date, or it's not a source.
- Developer fee inflating the cost basis to manufacture a higher loan amount. Underwriters see this constantly and strip it out.
- Round numbers everywhere. $700,000 hard costs, $100,000 soft costs, $50,000 contingency. Real budgets have odd numbers because they're built from real bids.
- Columns that don't tie.
Keep two versions
The lender version and your version.
The lender version follows their conventions and includes only eligible costs. Your version includes the developer fee, your true working capital float, your realistic contingency, and your actual return math.
They should reconcile to each other, and you should be able to explain any difference on a phone call. Sponsors who only have the lender version end up surprised at the closing table when their real cash requirement is $80,000 higher than the loan documents implied.
FAQ
What's the difference between sources and uses and a pro forma? Sources and uses is a capitalization statement — where money comes from and goes at project level. A pro forma projects operating income and expenses over time. Lenders want both on income-producing deals.
Should contingency be in sources or uses? Uses. It's a budgeted cost. It's funded proportionally by loan and equity like any other line.
Does the interest reserve count in loan-to-cost? Usually yes, on both sides of the ratio. Confirm it, because it materially affects your proceeds.
How much detail do hard costs need? Enough that a cost reviewer can benchmark each line. Fifteen to thirty trade lines on a residential project is normal.
Can I show sweat equity as a source? No. Lenders fund verified cash and verified basis. Your labor isn't a source of capital.
Putting a package together? Hub Financing builds lender-ready sources and uses, budgets, and submission packages for developers every week, and knows what each lender's underwriting team will strip out before you send it. Compensated by lenders at closing — no fee to borrowers.