Author: Melissa C. Martorella, Esq.
The process of making a loan secured by real property is a high-stakes affair.
That’s why aspiring lenders want to ensure they do everything possible to mitigate the risk of any potential legal issues that could impact their ownership rights if they need to foreclose on the property. A key component of doing so has to do with a warranty deed—an important contractual document that functions to protect your property against competing claims down the road.
Warranty Deed Basics
Every transaction involving a real estate asset necessarily involves two main parties: a grantor (seller) and a grantee (buyer), who can either be individuals or entities. The warranty deed is a contractual agreement from the seller promising that they own the property free and clear of any unresolved mortgages, liens, judgments, or encumbrances that could potentially adversely impact the grantee’s full enjoyment of their ownership rights in the future. Essentially, the seller is promising that they have the legal authority to officially sign over their ownership rights to the buyer.
Warranty Deed Process
Warranty deeds are not intended to prove that the buyer now owns a piece of property. Instead, it functions as a formal guarantee made by the prior owner that no one else can assert a legal claim to the property. The warranty deed document itself explicitly states specific details related to the property including address, parcel identification, a legal description, and the date ownership was transferred. To have legal effect, the warranty deed must be signed by a public notary and submitted to the city or county office responsible for maintaining real estate records. The warranty deed is delivered to the buyer at the conclusion of the closing process.
Warranty Deed Types
There are three main forms of warranty deeds:
General Warranty Deed
This type of deed provides the optimal amount of protection for the buying party. In the event that the general warranty deed is breached, the selling party is deemed responsible—even if the breach occurred without their knowledge or at a point in time when they were not the property’s legal owner. A general warranty deed entails the following guarantees made on behalf of the seller:
- The seller possesses legal ownership of the property and has the authority to transfer ownership.
- There are no unresolved mortgages, liens, or additional encumbrances against the real estate asset by any creditor.
- The seller possesses clear title.
- In the event of the breach of the warranty, the buyer is entitled to compensation from the seller.
- The seller intends to transfer ownership to the buyer.
Special Warranty Deed
This type of deed functions essentially the same as a general warranty deed. The only exception is that it is only applicable to a specific period of time. Essentially, the special warranty deed guarantees that the seller possesses title to the property and there never was a competing claim while they exercised ownership over it. That means that it does not cover claims made prior to when the seller obtained the title. Special warranty deeds are typically used in commercial real estate deals.
Grant Deeds
Grant deeds may be used in lieu of a warranty deed. It offers basically all the same safeguards as a general warranty deed, except it does not cover third-party claims.
Distinguishing between Quitclaim and Warranty Deeds
Although quitclaim deeds are like warranty deeds, they are not the same. A quitclaim deed only means that the seller is transferring their legal interest in a real estate asset and does not entail a guarantee that there are no other competing claims against the buyer’s future ownership rights. Lenders should favor warranty deeds over quitclaim deeds whenever possible because warranty deeds include a guarantee from the seller.
The warranty deed serves an important role in a transaction for the lender because it helps to make sure that the buyer has clear title. If the borrower has clear title, the lender will be in a stronger position if they need to foreclose upon the property.