Should I Buy a House With a Special Warranty Deed?

Felicia Oliver

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Felicia Oliver

June 28th, 2022
Updated June 28th, 2022

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Benefits | Downsides | Types of deeds | When special warranties are used | Title insurance | FAQs

Key takeaways

If a seller only offers a special warranty deed, title insurance SHOULD protect the buyer from any liens or claims on the property that the seller is or isn't aware of.

A special warranty deed will provide more complete protection in the case of a foreclosure sale or divorce settlement than a quit-claim deed.

Most residential mortgage lenders will insist on a general warranty deed. It protects both the bank and the home buyer.

Special warranty deeds are more commonly used in commercial transactions — when transferring a building or property used for a business from one owner to another.

What is a special warranty deed?

A special warranty deed guarantees that a property you're buying has no liens or debts, so the title to the house can be transferred free and clear. Not knowing about a lien means you risk becoming responsible for an outstanding debt — and losing your property if you can't pay it off.

However, a special warranty only applies DURING the time of the seller's ownership, not before. Any title issues covering the time period BEFORE the seller's ownership are on the buyer to address.

Title insurance protects against title issues regardless of time frame.

A special warranty deed offers less certainty than a general warranty deed, which offers protection for the entire time before the transfer of ownership from the seller to the buyer.

A special or limited warranty deed is also called a:

  • Statutory warranty deed in Alabama
  • Grant deed in California
  • Covenant deed in Michigan

Should you buy a house with a special warranty deed?

Get a title search if you plan to purchase a home with only a special warranty deed. A title search should uncover any liens and encumbrances on the property. You can then choose not to purchase the home or take care of the liability before moving forward.

A special warranty deed could work for you if:

You can get title insurance

If a problem with title arises later and you have to surrender your house, you can file an insurance claim and use the proceeds to buy another home.

Most lenders require home buyers to purchase title insurance to protect their loan investment in the property. But you can always buy a title policy yourself, typically for around $2,000.

You're acquiring property through a divorce settlement

While a quit-claim deed is often used for transferring property for a divorce, it provides no title warranty, so title insurance isn't possible.

Parties in a divorce — particularly an unfriendly one — should seriously consider using a special warranty deed versus a quit-claim deed. It will provide title protection covering the time when one or both parties owned the home, making it difficult for one of the parties to introduce a title conflict before the divorce settlement is finalized.

You're buying a foreclosed property

If you buy a foreclosed property, there may reasonably be a lien or outstanding liability on it. After all, the previous owner was unable to keep up with the mortgage payments — what else may they have been unable to pay?

You should still purchase title insurance so that you know before signing the sales contract whether and how much liability or outstanding debt there is. Then you can decide whether the amount of debt you owe outweighs the bargain you're getting on the property.

» READ: 7 FAQs About the Pros and Cons of Buying a Foreclosed Home

If you're buying a business or investment property

Special warranty deeds are more common in commercial transactions than residential ones. It's still always better to get a general warranty deed from the seller if possible, because it provides more protections from liens and claims predating the sellers ownership.

But if you can't get a general warranty deed, make sure you get title insurance.

The policy expense can be rolled into your closing costs, on your dime, but it's worth your peace of mind.

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DON'T buy a home with a special warranty deed if you're not getting title insurance

Title insurance is the best way to mitigate risk. If your title is ever challenged down the road, you'll be liable for any liens on the property without insurance.

» LEARN: How Much Does Title Insurance Cost?

What's a deed?

A deed is a document that transfers the rights of a particular asset, such as real estate, from one owner to another.

Deeds differ state to state, but they generally describe:

  • The property being transferred
  • A grantor (giver) and grantee (receiver)

Deed vs. title

Deeds and titles are similar legal documents, but they have important differences:

  • A title is the legal right of ownership over a piece of property or other asset.
  • A deed transfers the rights

General warranty deed

A general warranty deed covers a property's entire history. It guarantees that the property is free and clear from liens or liabilities regardless of when they happened or who owned the property at the time.

A general warranty deed is the most common and cleanest way of conveying title. It assures the buyer they're obtaining full ownership rights with no valid potential legal issues with the title.

Sellers usually pay for an owner's title policy that protects both seller and buyer from potential disputes.

Quit-claim deed

A quit claim deed is what a seller issues when they “quit” any claim that they had on a certain piece of property. There's no sale and no mortgage — and no guarantees of title either.

A quit claim deed is often used in transactions where no money changes hands, or when the people involved know each other well or have some common interest.

Examples include:

  • When a person gets married and wants to add their spouse to the title of their home
  • When a person wants to give a family member the right of survivorship for estate planning
  • Divorce proceedings to remove a spouse from title

» MORE: When to Use a Quit-claim Deed (And Why You'd Want to in the First Place)

When are special warranties typically used?

Commercial transactions

Special warranty deeds are most commonly used for commercial properties, like storefronts and office buildings, which frequently have high turnovers.

A current business owner could want to protect themselves from a long history of previous owners, liens, foreclosures, and other issues — without paying title insurance.

Residential transactions

Estate transfers

A special warranty deed is often used for transferring an estate property because its executor can likely vouch for the property's title only during the time that the deceased owned it.

Divorce settlements

A special warranty can protect people in the middle of divorce proceedings from an ex-spouse's ill will or bad behavior. It gives the one being given or sold the property better protection than a quit claim deed.

One couple in Illinois co-owned a cabin together. As part of their divorce settlement, the ex-husband agreed to transfer full ownership of the property cabin to his ex-wife.

A few days before signing the divorce settlement, the man's friend loaned him cash in exchange for the equity in the cabin. But since the friend had no documentation on WHO actually owned the property, they placed a second mortgage on the cabin — creating a conflict in title.

The man then transferred the cabin to his ex-wife using a quit-claim deed, which makes no warranties about ownership. So the woman didn't know anything about the new lien on the cabin — putting both her AND her ex's friend in a tough legal spot.

With a special warranty deed, the man would've been guaranteeing that the title hadn't changed. And a required title search would've revealed his friend's second mortgage on the cabin.[1]

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The importance of title insurance

Title insurance is an indemnity insurance policy that protects a buyer from financial claims against the title of a property they own. It's important because it protects the buyer and the seller from liability if a property title issue is found.

Most home buyers — regardless of the type of warranty deed they use — purchase title insurance when buying a property, to be safe and ward off any surprises. The title insurance company will research the title to ensure it is clear and then provide insurance so that you have protection should there ever be an old claim that is brought against your title. This is one reason why it's important to not cut corners and go to a reputable title company.

» MORE: What Is Title Insurance — And Do You Really Need It?

FAQs about special warranty deeds

A special warranty deed guarantees that a property you're buying has no liens or debts during the time of the seller's ownership, not before.

If you plan to purchase a home and the seller only provides a special warranty deed, a title search SHOULD uncover any liens and encumbrances on the property that the seller is or isn’t aware of.

The risk is that if you don't have title insurance, you could find out that there is a lien or liability on the property, and your home could be taken away in order to clear that debt.

Title insurance is the best way to mitigate that risk.

Related links

ARTICLE SOURCES
[1]

Illinois Association of Defense Trial Counsel. "Is it a Dirty Deed? The Argument for Using Special Warranty Deeds, p.2, When special warranties are needed." Accessed 06/27/2022.

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