When purchasing a home, there are a number of very important legal documents involved. Two such documents that you may encounter are a warranty deed and a deed of trust. A financial advisor could help you navigate through important financial decisions when buying real property. Let’s break down what each document does, what the differences between them are, and when they might come up in the home-buying process.
What Is a Warranty Deed?
A warranty deed is a legal document that is used when transferring ownership of property from a grantor (seller) to a grantee (buyer). It is provided by the seller, and offers certain guarantees to the buyer of that property.
The warranty deed guarantees to the buyer (and the buyer’s lender, if applicable), that the property:
- Is owned by the seller, free and clear
- Does not have any outstanding debts, including mortgages
- Does not have any outstanding liens, judgements or encumbrances
Essentially, a warranty deed affirms that the seller owns the property, has the right to sell the property and that no third parties can lay claim to the property. It is often issued as part of a title search and includes important details such as the address of the property, a description of the lot or parcel, information about the parties involved and the date of the transaction.
Getting a Warranty Deed
When it comes to warranty deeds, there are two types you could encounter: a general warranty deed and a special warranty deed.
A general warranty deed guarantees everything mentioned above and affirms that the property has a clear, transferable title. Generating one of these typically involves an extensive title search. If a lien, judgement or other claim to the property is later found or brought forward, the grantor who issued the general warranty deed can be held liable.
A special warranty deed is the more limited of the two. It also affirms that the seller owns the property and intends to sell it to the buyer; however, it only guarantees that there were no liens, judgements or claims against the property while the seller owned it.
Special warranty deeds don’t offer any guarantees for the timeframe before the current seller owned the property. This means that a claim or old lien against the property could eventually surface and impact the new buyer. The seller who signed the special warranty deed is not liable, though, unless the claim in question relates to when they owned the property.
What Is a Deed of Trust?
A deed of trust is a different type of real estate document that you may receive when buying a home, and can replace a mortgage loan in certain states. Essentially, this document is the buyer’s agreement to repay their mortgage lender according to the terms of their new home loan. A deed of trust is issued at closing, and involves three parties: the trustor (borrower), trustee (third-party who will hold the title; usually the title company) and beneficiary (lender).
As with a mortgage loan agreement, the deed of trust will spell out the details of the agreement including a description of the property, the original loan amount, how the loan will be repaid, what happens if the buyer defaults, any fees involved and a schedule of the loan.
When the lender issues a deed of trust, the borrower will provide the lender with a promissory note in return. This promissory note is the buyer’s binding promise to repay the loan as scheduled. When the loan is repaid, this document will be returned to the buyer and marked as paid in full; at that time, the trustee will also transfer the property’s title to the buyer.
Using a Deed of Trust
Deeds of trust are issued in place of mortgage loans in the following states:
- Alaska
- California
- Colorado
- District of Columbia
- Georgia
- Hawaii
- Idaho
- Maine
- Massachusetts
- Minnesota
- Mississippi
- Missouri
- Nebraska
- Nevada
- New Hampshire
- New Mexico
- North Carolina
- Oregon
- Rhode Island
- Tennessee
- Texas
- Utah
- Virginia
- Washington
- West Virginia
- Wyoming
In Alabama, Arizona, Arkansas, Illinois, Kentucky, Maryland, Michigan, Montana and South Dakota, lenders can choose to use either a deed of trust or a mortgage. In the remaining states, only a mortgage loan is allowed.
Bottom Line
When buying a home, you are likely to encounter a warranty deed, a deed of trust… or sometimes, both. However, while these two legal documents are an important part of the real estate process, and often involve a title company, they play two very different roles. A warranty deed ensures a buyer that the property is owned by the seller and is able to be sold without any encumbrances. A deed of trust is used in certain states, and represents a buyer’s guarantee with their lender to repay the property loan as scheduled.
Tips for Warranty Deeds vs. Deeds of Trust
- Depending on which state you purchase a home in, you may be issued a deed of trust in place of a mortgage loan agreement. Warranty deeds may be required by lenders before they will finance a home purchase.
- If you have additional questions about the types of warranty deeds, what your deed of trust means or how it differs from a mortgage loan, consider chatting with a financial professional. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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