As a homeowner, you may use a deed to transfer ownership of your property or secure a loan. Deeds come in various forms, each with specific purposes, but two of the most commonly used are grant deeds and deeds of trust. It can help to understand the different types of deeds, the unique functions of grant deeds vs deeds of trust and the key differences between them. Whether you’re transferring property ownership or setting up a loan, these distinctions are essential. For expert guidance on managing real estate transactions, consider consulting with a financial advisor who can help you with these complex decisions and align them with your broader financial goals.
Types of Deeds
There are six common types of deeds, with each one serving a specific legal purpose. The type of deed you’ll use when transferring ownership depends on several factors pertaining to the property in question, including ownership, history and liens.
- Quitclaim deed. Quitclaim deeds transfer ownership between familiar parties, such as family and divorced spouses. This deed offers minimal legal protection to the grantee against liens or other debts against the property.
- Deed of trust. A deed of trust uses a third party to transfer property from one party to another. This trust acts as security against a loan on the property in case the borrower doesn’t make their payments.
- Warranty deed. There are two types of warranty deeds – general and special. These deeds offer legal protections to the grantor in case there is a problem or defect with the title once it has been transferred.
- Grant deed. A grant deed transfers the property from the seller to the buyer for an agreed-upon price. It guarantees that the seller owns the property, but doesn’t offer protection against title defects.
- Bargain and sale deed. Bargain and sale deeds guarantee that the grantor is the title-holder, but does not guarantee that the property is free of debt or liens.
- Mortgage deed. This is a legal document between a borrower and a lender. It secures the property as collateral and allows the lender to place a lien if the loan isn’t repaid.
What Is a Grant Deed?
A grant deed is a legal document used to transfer the ownership of real property between two parties for a specific price. It includes several pieces of information:
- The full legal description of the property
- The names of the people that the property is being transferred to (grantee) and from (grantor)
- The sales price
Grant deeds guarantee that the grantor is the legal owner of the property. The grant deed states that there have been no title problems while the grantor has owned the property. However, it does not guarantee that the property is free of title defects that happened before the grantor acquired the title. These defects may include:
- An error in public records
- Improper signatures of either party
- An undisclosed lien against the property
- Boundary disputes between neighbors
What Is a Deed of Trust?
A deed of trust is a legal document that secures a loan against the property. The deed of trust ensures that the property is collateral for the loan in the event that the borrower doesn’t make their payments. If the borrower doesn’t make payments, then the lender can foreclose on the property. The deed of trust ensures that the lender receives the proceeds of a sale or auction of the property securing the loan.
With a deed of trust, the lender can foreclose on the property and sell it without a court process when a borrower does not pay. Because it doesn’t require a court hearing, a deed of trust is faster and less expensive than foreclosing on a mortgage deed.
Deeds of trust can also be assigned without approval from the borrower. Many lenders sell their loans and assign the deed of trust to the new loan servicer or owner. The borrower is notified of the transfer so they know who to send the payments to going forward.
Grant Deed vs Deed of Trust
The major difference between a grant deed vs deed of trust has to do with the presence of a loan and future obligations. Once a grant deed has been executed, the grantor is usually no longer involved with the real estate.
On the other hand, with a deed of trust, the borrower and the lender have an ongoing relationship until the loan is paid off or the property is transferred to another party. When a property is transferred, the lender uses an “assignment of trust deed” to transfer their rights to the new lender.
If a borrower does not make their payments, the lender has the right to foreclose on the property to seek repayment of the loan. With a grant deed, the grantor does not retain these types of rights on the property. Once the transaction is executed, they relinquish all rights.
Bottom Line
There are many different types of deeds that may be used for the transfer of real property. Depending on the circumstances of your transaction, you’ll use one type over another. A grant deed is a transaction between two people or entities without securing the property as collateral. A deed of trust is used by mortgage companies when a homeowner takes out a loan against the property. This document makes it quicker and cheaper for a lender to foreclose on the property if the borrower does not make their payments.
Real Estate Tips
- When purchasing or selling a property, you’ll use some type of deed to transfer ownership. Many property owners use deeds to transfer ownership of their property into a trust for estate planning purposes. Transferring title may impact your capital gains taxes, so use our capital gains tax calculator before making any changes.
- Buying or selling a home can impact your financial goals. Speaking with a financial advisor can help you determine the impact and how that changes your savings strategy going forward. Finding a qualified financial advisor doesn’t have to be hard. 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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