How Does a Limited Warranty Deed Work?

Image of people reviewing legal documents with pens in their hands. Captioned: How Does a Limited Warranty Deed Work?

When you pass along a title with a limited warranty deed, you pass along assurances that the title has not been clouded under your watch.

The limited warranty deed doesn’t offer the full set of title assurances that fortify a general warranty deed. But it carries higher assurances than a quitclaim — which doesn’t declare a property free and clear of liens or other issues. A special warranty deed tells us that the party conveying it has the right to do so, and that any known burdens on the title are obvious on the deed. There is no guarantee against any title defects dating from earlier owners, though.

Limited warranty deeds, also called special warranty deeds, are uncommon in standard home purchase agreements. But they are frequently chosen for transferring title when a general warranty deed is too risky for a seller to offer, or simply inappropriate for the transfer.

Standard Practice: Where Limited Warranty Deeds Are the Norm

Limited warranty deeds commonly appear in certain situations. These are just a few of them:

  • In probate court, to transfer a home out of an estate. This is normal, especially when the personal representative is unfamiliar with the property. In this situation, the personal representative is promising that nothing has been done to compromise the title during the probate period, but stops short of guaranteeing the chain of title before that.
  • In short sales, tax sales, and foreclosed or real-estate-owned (REO) properties, which are more likely than other homes to carry unknown title issues and debt baggage. The title holder only guarantees the title to prospective buyers for the period it held that title. The buyer receives no warranty for the property’s earlier title history. 
  • In commercial real estate deals, as the properties can frequently change hands, potentially passing along old claims and debts. Grantors of a limited warranty deed only assure a good, clean title for the time period they had control over it.
  • In transactions involving HUD or Fannie Mae, or other parties that use limited warranty deeds routinely. Here again, these parties do so because they want to restrict the risk of title defect problems to the period of time when they actually held the title.

In some places, the limited warranty deed and its words “specially warrant” have been dropped because special could sound more protective than general. Maine, for example, previously had special warranty deeds but renamed them quitclaim deeds with covenants of warranty.

Temporary Title Holders: Using the Limited Warranty Deed to Place a Home Into a Trust

When fiduciaries or trustees hold titles on behalf of beneficiaries, special warranty deeds are common. So, this type of deed may be appropriately used by private owners who put their homes into trusts.

With the trusts as with other transfers, the deed must follow procedures for being signed, acknowledged, and recorded at the county recorder’s office. The recording of a Statement of Authority may be required (such as this example, for Colorado) together with the conveyance to the trust, executed by the trustee. 

A benefit of the warranty deed — either general or limited — in the trust situation? It does not disturb the title insurance policy.

​Limited Warranty Deeds in Property Sales: What Buyers Should Know

You may be asked to sign a purchase agreement that says a limited warranty deed will convey the title. If so, it means no liens or encumbrances exist that aren’t obvious on the deed. This means you won’t face unexpected deed problems, boundary disputes, unstated easements, prior claims, liens or other problems arising on account of the party conveying the property (called the grantor). it’s the grantor’s obligation to stand behind the promises made on the deed, and to remediate any title claims incurred on the grantor’s watch. In other words, the buyer is covered for any title problems caused by the grantor’s own actions or omissions.

But a limited warranty deed could come along with issues dating back before the grantor held the title. What kinds of old claims can haunt a title? Some, like unpaid property taxes in the chain of title, involve governments. Local code violations could have resulted in liens. Unless the applicable title insurance extends back to cover the claim against an earlier owner, or a statute of limitations has kicked in, the new owner might have no choice but to resolve the old debts or fines.

Pro tip: Each state, as well as the federal government, has its tax lien laws and limitations. The state tax agencies can provide specifics. The home’s county recorder keeps track of existing liens and releases.

Claims Against the Title: The Role of Insurance for Buyers

Recipients of special warranty deeds should check with a title company early in the process to be sure the property can be covered. The best title insurance policy is one from a major underwriter that will withstand the test of time.

The mortgage lender will have the borrower pay for lender’s insurance, but the buyer also needs to be the beneficiary of a policy. This is achieved by purchasing an owner’s title insurance policy, and knowing what it covers. For best assurances, buyers should have their own title attorneys run title searches, and purchase owner’s title insurance at closing.

If a claim on the title arises from an interaction during the grantor’s time of ownership, the buyer then has access to remedies from the title insurer (and the grantor, if the insurer goes after the grantor). If the problem stems from an earlier link in the chain of title, the buyer will still go to the title insurer to cover the lost value.

The Nuts and Bolts: Creating a Limited Warranty Deed

Each county has requirements for the correct completion of the limited warranty deed within its state. A completed limited warranty deed contains:

  • The name and address for the seller (grantor) and the purchaser (grantee).
  • The property’s location and full legal description, matching the legal description on the existing deed.
  • A statement that the grantor owns and has the legal right and intention to convey the property to the named grantee (the standard granting clause reads: “Grantor remises, releases, alienates, and conveys”).
  • A guarantee that no debts attached to the property when the grantor held the title. Any encumbrances must be expressly noted on the deed.

An effective deed is signed, acknowledged, and recorded. The correct deed, with the correct language, is absolutely essential. For example, under Ohio law (compliant and continually updated Ohio special warranty deeds for all counties are available here), the deed must be signed by the grantor. It must be acknowledged by the grantor in front of a notary public or person authorized to certify and sign the acknowledgment. The conveyance fee or exemption form must accompany the deed.

Going Forward: Best Practices

A limited or special warranty deed is like a general warranty deed, with one key difference: it doesn’t guarantee the whole chain of title. For a standard home purchase, a general warranty offers fuller protections. But a special warranty is the norm in certain situations and places. And even a general warranty carries risks, as chains of title can be long and complex, with various deeds in play before the deed the current buyer acquires. Look to title insurance to cover potential title issues for any deed.

Best practices when accepting a limited warranty deed are straightforward. Work with a professional real estate agent. Have a title search done. Get an owner’s title insurance policy at closing. Before signing a real estate deed, consult a local attorney with case-specific questions of legal significance.

Supporting References

Knud E. Hermansen, Deeds: A Primer for Surveyors (2015, University of Maine).

Photo credit: Aymanejed, via Pixabay.