What You Should Know About Different Types of Deeds and Title Insurance
May 1, 2018
There's more than one way to buy a house, so it's only natural that there's more than one kind of real estate deed. If you're buying or selling a home this year, you'll want to make sure you use the best type of deed for your circumstances. Of course, there's no single correct answer, and the type of deed you'll use in your next real estate transaction will depend on some variables. The legal intricacies of deeds can get complicated, so it's a good idea to familiarize yourself beforehand.
The Types of Deeds
Most people understand the basics of what a deed is, it's the means by which a real estate title is conveyed from one party to another in a home purchase, sale or other transfer transaction. Many ordinary homeowners are unaware that there are multiple kinds of deeds, and that different types of deeds offer different levels of protection to property owners. Warranty deeds and quitclaim deeds are the most familiar types of deeds home buyers will encounter. However, you may also hear about such instruments as special warranty deeds, deeds of trust, grant deeds and bargain and sale deeds. The type of deed chosen for your next real estate transaction matters, both regarding your rights and the effect on any potential title issues. Deeds are directly related to that all-important question: "How does title insurance work?" because the answer is that it depends on the type of deed. Let's take a look at each one.
A warranty deed is probably the most common way to transfer a title in a traditional home sale. As the name implies, this kind of deed warranties that the state of the title is good. This means that the home buyer (known as the grantee) has legal recourse against future claims to the property, because the seller guarantees that they have sole claim to the property and no other entity has any claim or lien on either the land or the home structure. This type of deed not only conveys an "interest" in the property, but promises the new title holder that he or she can legally purchase, possess and enjoy the property. So it's no wonder that warranty deeds are the preferred instrument for transactions involving a mortgage lender and title insurance company. The process for obtaining a warranty deed involves a thorough title search, meaning you will be able to purchase a title insurance owner's policy for added protection and peace of mind.
Deeds of Trust
A deed of trust is not so much a deed in the standard sense as it is a part of the mortgage process. While a traditional warranty deed involves two parties, a grantor and a grantee, a deed of trust involves three parties: a borrower (trustor), a lender (beneficiary), and a trustee (a third party, who in many cases is a title company). Not all mortgage loans involve a deed of trust instrument. Some only involve two parties: a mortgagor and a mortgagee. Whether you'll have a deed of trust depends largely on your location. Sixteen states only allow mortgages, while 26 only allow deeds of trusts, and nine allow either. Notably, a deed of trust makes it easier for lenders to foreclose when a borrower has defaulted on a home loan.
Let's next talk about the grant deed. This deed, available in certain U.S. jurisdictions, is similar to a warranty deed, with some exceptions. Generally, a grant deed offers the same protections of the warranty deed, guaranteeing to the grantee that the grantor warrants that no other party has a claim to the land and that there are no other liens or restrictions on the property. The exception here, and it's an important one, is that a grant deed doesn't warranty against third-party claims. In certain situations, a grant deed is a viable option. It is often used in the jurisdictions where it exists during divorce proceedings. This type of deed avoids a reassessment of property tax values, which may be significant in some cases. A grant deed may offer certain protections to the grantee, but a previous title insurance policy may not be of help if a third-party claim arises. So, it's best to consult with your title insurer and a real estate attorney if you are considering this kind of deed.
Special Warranty Deeds
Some sales transactions may not use a traditional warranty deed and instead use a special warranty deed. A special warranty deed can be used to address title defects that arose during the seller's (grantor's) ownership. This is a type of deed that makes it possible to cure such title defects so that the sale can be completed. However, a special warranty deed generally doesn't guarantee that the buyer will enjoy the property claim-free for life. It is possible that a claim could come up in the future that predates the ownership of the grantor. In such a case, the grantee may not have recourse against the grantor. This can affect the protection that would otherwise be covered by a title insurance owner's policy and may leave the new buyer without full protection from some title claims.
A quitclaim deed is an instrument for conveying the interest in a property that doesn't come with a warranty. Think of it as an "as is" deed. This kind of deed exists to pass along any title, interest, or claim that a seller has to a buyer. However, there is no title search involved, none of the covenants of a warranty deed are made and there is no guarantee that a title is valid. The grantee gets whatever interest the seller (grantor) has to give, but makes no guarantees. As risky as this may sound, a quitclaim deed can be the right instrument in certain situations. For one, it's a good way to correct typographical errors in an existing warranty deed. It can also be used to add or remove a person, such as a spouse or family member, from the title, or when a person wants to gift a piece of property to a relative without a traditional sale. Due to its lack of warranty, a quitclaim deed is best utilized between trusted family and friends, or between a property owner and that person's limited liability business entity. Other quitclaim uses exist. A quitclaim may be used to remove a known title defect that is not disputed and can later be transferred through a warranty deed. Certain jurisdictions, notably Massachusetts, also prefer conducting regular property sales through quitclaim deeds rather than warranty deeds. When it comes to title insurance, it's a very good idea to contact the grantor's title insurer and consult a real estate attorney before opting for a quitclaim deed, as it may adversely affect your title insurance coverage and protection against future claims. Though this kind of deed is popular for its ease of use, some argue that a warranty deed may be a better solution, even between family and friends.
Bargain and Sale Deeds
Finally, a bargain and sale deed resembles a quitclaim deed in some respects, yet it can also be written with covenants, making it similar to a grant deed. In general, a bargain and sale deed does not offer warranties against encumbrances on the property, nor does it guarantee the title is free of defects. When used as a quitclaim deed between close family and friends, these deeds are particularly common in Colorado, New York, Vermont, Washington and Wyoming. However, a bargain and sale deed can also be used in the process of foreclosure or court seizure. There is also the possibility with these deeds to include covenants, which offer the grantee (buyer) some added protection that the grantor (seller) does indeed own and has the right to sell the property. Such covenants make a bargain and sale deed a bit like a grant deed. However, title insurance policy coverage may not be conveyed along with this deed, and that could leave a buyer exposed to potential claims from third parties.
Buying or selling a home is an exciting opportunity. Even a non-traditional transaction, such as moving a property to your business entity, gifting a home to a family member or changing who is on the title, is a big move that has many homeowners looking ahead to the future. However, it's important not to lose sight of the details, such as the type of deed you use for these transactions. A real estate property is a big investment. Wherever possible, you should ensure that your investment is protected for the long term with a title insurance owner's policy. If you are transferring the title of a property you own that already has title insurance coverage, make sure to consult with your title company and a real estate attorney, to ensure your property remains protected. Whenever possible, make sure that your investment is protected against potential future claims so that you can enjoy your property with peace of mind for many years to come.