Special Warranty Deeds on Foreclosed Homes

In a standard “arms-length” real estate purchase, the Seller of the property executes a General Warranty Deed to the Buyer. The General Warranty Deed warrants (or insures) that title to the property is clear and unencumbered and that if a problem with the title arises in the future the Seller will pay the attorneys fees or other costs required to clear up the title problems. The General Warranty Deed insures the title going back to the beginning of time.

An “arms-length” purchase is a purchase where there are no special deals between the two parties like those that often occur between relatives or other close friends where the “quit claim deed” is often the deed of choice.

Special Warranty Deed and Foreclosed Homes
Given the current real estate climate, many buyers are purchasing foreclosure homes from banks. In these situations the bank is the Seller as the bank has taken the property and retitled it in the name of the bank. Although purchasing a foreclosure home from a bank is considered an “arms-length” transaction, most banks will not provide the Buyer with a General Warranty Deed. Instead, most banks will only agree to provide the Seller with a Special (or Limited) Warranty Deed. 

A Special (or Limited) Warranty Deed transfers title to the Buyer, but limits the time period under which title to the property is insured. A Special Warranty Deed limits the bank’s insurance of the title to the time when the bank first became owner of the property. Anything that may have happened to the property prior to the bank’s ownership is not insured. This is usually not a problem if the bank’s foreclosure process was done properly and all other lien’s on the property (besides the bank’s mortgage) were either paid or closed out.

An Owner’s Title Insurance Policy is Recommended
If you are purchasing a foreclosure home from a bank, it is recommended that you have a Title Insurance Company provide you with an Owner’s Title Insurance Policy. This type of policy will provide you the same protection as the General Warranty Deed. Instead of the bank being responsible for insuring title to the property from the beginning of time, the Title Insurance Company is responsible.
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