Which Is Better: Warranty of Title, or Title Insurance?

Great question! First, a warranty of title is stated in a warranty deed. And most any buyer in a regular home sale gets a warranty deed. So your question could also be posed as: “I’m getting a warranty deed. Do I still need an owner’s title insurance policy?”

Let’s break this down.

What’s the Difference Between a Deed and a Warranty of Title?

A deed serves as proof of the legal transfer of a home’s title—that is, ownership. The deed lays out the  detailed information about the home as it transfers title from one owner to the next. Stated on the deed are the names of the parties. A precise legal description identifies the property; this must be the same from one transfer to the next.

And a warranty deed contains a promise of good, clear title. So, a warranty of title is a legal promise that the seller has full rights to sell you the home. The seller is stating that they know of no claims that call their full ownership rights into question.

A general warranty deed is the standard deed received by a home buyer. A mortgage lending company will expect a general warranty deed for any home purchase they approve for financing.

When a deed is legally transferred, it must become part of the public record. This is a matter of having the seller’s signature properly notarized, then filing the deed with the recorder’s office in the county where the property exists.

A general warranty deed provides assurances from the seller. It guarantees that the seller has full rights to transfer the title. And it promises that the seller will defend the buyer from past or future challenges.

So, through a warranty deed, the seller’s transfer of property “warrants” to the buyer:

• The seller has the legal right to transfer the property.

• The property is free of undisclosed liens, loans, unpaid taxes, or other burdens.

• No third party has a claim to the title and could show up to challenge the buyer.  

• If any third party claim does arise, the seller promises to defend the buyer against it.

The risk that any of these promises will be broken is especially low when a home is purchased with financing. Loans are issued after a title officer researches the chain of title. If this brings up any deed errors, missing owners, liens, or other clouds on the title, the title company works to resolve them before closing.

The chain of title is the full line of ownership of a particular property. Learn more about the chain of title with Deeds.com. 

What Happens In a Breach of Warranty Situation?

OK, what about the odd case? Given how many owners held the deed to the property before the buyer gets it, issues can slip past a title examiner. These can involve previously unknown breaks in the chain of title, easements, unresolved liens and court judgments, and so forth. So, what if a buyer gets a warranty deed, and an old lien later turns up, or some earlier owner retained some partial claim to the property? What if it turns out the property had a lien for unpaid taxes, unpaid construction work, or a debt that was left unresolved? What if a former owner never resolved fines for code violations, or racked up leinable homeowner association fines?

Then it would appear that the title was in fact not clear as promised when transferred. If this is the case, there has been a breach of warranty.

If such a dispute were to arise later, the buyer would have to go to the seller for a resolution, or compensation for the lost value. A past owner could take care of the matter by resolving an old debt. Or the past owner could quitclaim the share that they never legally let go. If this kind of resolution can happen, great. 

But what if the past owner doesn’t cooperate? Then the buyer would need to take legal action against the seller to enforce that legal contract. And the buyer would need to show the court that the seller knew (or should have known) about the defective title.

Courts can resolve breaches of contract. But court cases also involve costs, fees, time, and stress.

Unlike a general warranty deed, a limited warranty deed doesn’t cover whatever might have occurred before the present seller owned the home. This deed is common for developers and in bank-owned property sales.

Owner’s Title Insurance to the Rescue?

Stuff happens. This is why a buyer would make a payment at closing to insure the title. In some locations, the seller covers this payment. (Ask your agent or mortgage broker for details.)

Once the owner’s title policy is in place, there’s no need to pay any more premiums. It costs a few hundred dollars—a one-and-done payment at closing. And it covers the buyer’s full time as a deed holder. It also offers protection when the insured owner transfers the title to the next deed holder.

Most buyers already do pay for a policy that names the lender as beneficiary. That protects the lender’s stake in the title throughout the course of the mortgage. Buyers themselves can, if they wish, obtain their own title policy from the same insurer at closing. Alternatively, shop around for owner’s title coverage from an insurer licensed in your state.

Now, imagine an old lien surfaces later. Or a mistake on the deed. Or some earlier owner didn’t actually transfer all of the property. An insured deed holder can call the title company to handle the matter.

Title insurance covers a range of possible issues that a warranty deed does not. So, there’s no reason to choose between getting a warranty deed and getting an owner’s title policy. You can plan to obtain both on closing day.

Title insurance shields a buyer from risks that could put full ownership rights in jeopardy. An enhanced title insurance policy may address liens recorded both before and after the policy’s effective date.

Policies That Matter Most to Deed Holders

When you buy a home, your basic insurance needs include owner’s title insurance, and a homeowner’s insurance policy in case of physical property loss or damage. (We cover homeowner’s insurance here.)

One of the leading title companies, which offers resources we consult, is First American. The First American Eagle Policy® is title insurance that covers both past situations and some potential future situations, such as title theft after you already hold the deed.

We hope this article offers a helpful orientation to protecting your home ownership. If you would like to know more, speak with a title insurer of your choice.