Mortgage Loans

How Does a Special Warranty Deed Work?

When you buy a house, you sign a deed, which legally transfers property ownership. In real estate, there are a few types of deeds including a general warranty deed and a special warranty deed. Most purchases include a general warranty deed, but not all.

When is a special warranty deed required? We help you understand how it works below.

What is a Special Warranty Deed?

A special warranty deed only promises that the property was ‘issue free’ while the current owners (sellers) held the property. They promise that the title is free and clear of any issues during their time in the home (or owning it).

The deed does not hold the seller liable for any issues or claims against the property that occurred before they took ownership, though.

How Does It Differ From A General Warranty Deed

Typically, buyers come across two types of deeds – special warranty and general warranty. A general warranty deed provides a bit more protection for the buyer because it covers not only the time the sellers owned the property but all previous ownership too.

In other words, the general deed promises that the home is free and clear of any issues stemming from when the house was first built. If any issues arise, the seller is liable whether the issues were during their time of ownership or before.

Who Uses It?

Special warranty deeds aren’t the norm in a standard purchase transaction. When you buy a home from someone, they usually issue a general warranty deed, ensuring that the property is free and clear of any encumbrances.

Certain situations, however, warrant this kind of deed including:

  • Selling someone else’s estate – If the seller inherited the property, he/she may not know the home’s history. For example, if the seller inherited his grandpa’s estate, he may know the home was free and clear of issues while his grandpa lived there, but he may not know what happened before then. The seller doesn’t want to be liable for issues before his grandpa’s ownership.
  • Foreclosure sales – When a bank or another authority takes over possession of a home, they can’t warrant it for its previous ownership. They only know the home’s status when they take possession and that’s all they will guarantee. A bank will ensure that there aren’t any new liens on the property, but that doesn’t mean there aren’t back taxes or other liens that may come with the property, so do your due diligence.

The Importance of Title Insurance

A special warranty deed has specific difference compared to a general warranty. Some of these difference are very important if you're the buyer.

If a seller only offers a special warranty deed and not a general warranty deed, title insurance is crucial. Your lender will require lender’s title insurance no matter the type of deed the house comes with, but owner’s title insurance is optional.

With a special warranty deed, though, it’s always a good idea. Since there’s no guarantee that a previous owner or creditor could come forth and stake a claim in the property, it’s important to protect yourself or you could become house poor.

When you buy title insurance, the title company does a title search. They look for any outstanding liens or encumbrances on the property. They then insure the property from that point on. This means if someone comes forward with a claim, you can use your insurance to help cover the legal costs that occur.

What is a Quit Claim Deed?

Don’t confuse a special warranty deed with a quitclaim deed. While both don’t cover much – a quitclaim deed covers even less. All a quitclaim deed does is transfer the property from one person to another as is. It does not include any promises that the property is free and clear of any liens or encumbrances. 

Is It Risky For The Buyer?

It’s up to you if you want to take a chance on a special warranty deed. The best option is a general warranty deed because then you know you’re covered no matter what happens moving forward.

With a special warranty deed, you should strongly consider title insurance. While it’s an added expense on your closing costs, it protects you from financial destruction moving forward. You can shop around for title insurance, just like any other insurance if you’re concerned about the cost.

The bottom line is that you take care of yourself financially, no matter what type of deed transfer the home you purchase includes. While certain situations require different warranties, there is always a smart way to handle it.