When originating a business purpose loan secured by real property, a warranty deed can be a key tool for mitigating risk. Lenders want to ensure that nothing can threaten the borrower’s ownership rights, particularly if foreclosure becomes necessary.
Acting as a contractual safeguard, this legal instrument helps protect the lender’s collateral from claims or title defects. In this article, we’ll outline what it is and how it can be used in your lending strategy.
The Basics
Every transaction involving the exchange of a real estate asset involves two main parties: a seller and a buyer, either of which can 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 buyer’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.
The Process
Warranty deeds are not intended to prove that the buyer now owns a piece of property. Instead, they function as a formal guarantee made by the prior owner that no one else can assert a legal claim to the property. The 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, it must be signed by a public notary and submitted to the city or county office responsible for maintaining real estate records. It is then delivered to the buyer at the conclusion of the closing process. The acquisition process typically involves real estate agents, closing companies, or attorneys who facilitate the transaction and ensure all legal protocols are followed.
These professionals help coordinate the necessary paperwork, conduct due diligence on the property’s title, and oversee the signing and recording of the deed. This process not only provides both buyer and seller with confidence in the transaction but also ensures that the property’s title is clear of unresolved claims, giving peace of mind that no other party can assert legal ownership.
Warranty Deed Types
General
This type of deed provides the optimal amount of protection for the buying party. If the 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.
When Is It Typically Used?
This deed type is most often utilized in standard residential real estate transactions where the buyer seeks maximum assurance regarding the property’s title. Because of the broad level of protection they provide, these deeds are the preferred option whenever buyers want comprehensive guarantees against any prior claims or defects, regardless of when those issues may have arisen.
For that reason, these types of deeds are a mainstay in conventional home sales as well as other transactions where clear and secure property ownership is a top priority.
Special
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. Essentially, the special warranty deed guarantees that the seller possesses title to the property and that there never was a competing claim while they exercised ownership over it. It does not cover claims made before the seller obtained the title. These types of deeds are often used in commercial real estate deals.
While this type of deed offers the buyer a layer of protection, its coverage is limited strictly to the timeframe during which the seller owned the property. If any title issues, code violations, or unpaid fees associated with the property arose before the seller’s period of ownership, those risks remain with the buyer.
In other words, the seller is only responsible for claims that occurred during their tenure as owner, and not for any problems that may have originated earlier. As a lender, it is important to confirm with your title company that your policy will cover the period that this deed does not cover.
This narrower scope of protection distinguishes these deeds from general warranty deeds and is a key reason they are more common in commercial transactions where the history of ownership may be more complex.
Grant
Grant deeds may be used in place of a warranty deed. It offers all the same safeguards, except it does not cover third-party claims. Grant deeds are often used for conveyances where the buyer and seller are affiliated.
Special Purpose
Special purpose deeds are unique instruments used in particular situations that don’t fit the usual mold of a standard property sale. Special purpose deeds are tailored to fit the needs of specific transactions and often offer limited or no protection regarding title.
Examples of special-purpose deeds include Administrator’s Deeds, Personal Representative’s Deeds, Sheriff’s Deeds, and Tax Deeds. Each of these is typically used when property must be transferred due to circumstances such as estate settlements, court orders, foreclosure proceedings, or delinquent taxes. Since these deeds serve a distinct purpose, they oftentimes do not come with the same robust assurances that a warranty deed would. As a result, the new owner may have little or no recourse against the prior owner if title issues later arise.
Special-purpose deeds are practical tools for navigating unusual or legally mandated real estate transfers, but they should be approached with an understanding of their limitations.
How is a Quitclaim Deed different?
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.
If you are a lender, and your transaction involves a special-purpose deed or a quitclaim deed, it is recommended that you get the best title insurance possible and confirm with your title company whether you will be covered in the event the deed is not sufficient.
How Fortra Law Can Help
Ensuring that your collateral is protected starts with the right legal documents. The Fortra Law team has extensive experience advising lenders on title issues, foreclosure readiness, and transactional safeguards that minimize risk.
If you have questions about warranty deeds or need guidance on structuring your next loan, contact our team today to ensure your lending portfolio is backed by strong legal protection.
