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What are the legal risks of getting a construction loan?

When embarking on a construction project, securing a construction loan is a common practice. While it offers financial support, there are also potential legal risks of which to be aware.

Understanding these risks can help you navigate the process more effectively and safeguard your interests throughout the loan process.

Contractual obligations and liabilities

One primary legal risk lies in the contractual obligations associated with a construction loan. Borrowers are bound by agreements with lenders, contractors and subcontractors. Failing to fulfill these obligations can result in legal consequences. Be sure to thoroughly review and understand the terms of each contract to avoid disputes that could lead to legal action.

Compliance with building codes and regulations

Construction projects are subject to numerous building codes and regulations imposed by local authorities. Non-compliance can lead to fines, delays and even the suspension of construction. Ensuring that your project adheres to these regulations is a must.

Property liens and title issues

A construction loan involves the use of your property as collateral. Legal risks can arise if there are disputes over property liens or title issues. Clearing these matters is a necessary prerequisite to avoid legal complications that may hinder the loan process or impact the property’s ownership.

As of 2022, home construction loans were growing at their fastest pace since six years prior. The total value of home construction loans was a reported $92.4 billion, to say nothing of commercial construction loans. With so many homeowners and business leaders seeking construction loans, it is more important than ever for all property owners to understand the possible pitfalls that may emerge in these types of agreements.