The first time most people see the pile of papers they need to sign is at the closing meeting. By this point, borrowers have often spent a month or more dealing with the homebuying or refinancing process and are ready to just get it over with—understandably. However, it can be useful to have some basic knowledge of what you’re signing, since these documents are legally tied to your new investment and could come up in the future.
Main Deed Types
Deeds are contracts that transfer ownership in property from one person to another—also known as the conveyance from the grantor to the grantee. There are three main categories of deeds, which all have their own legal significance regarding the warranties, or promises, made by the grantor to the grantee regarding the property. Knowing exactly what warranties the seller is extending in a property is good to know before signing anything.
Just as the name suggests, a warranty deed (also known as a general warranty deed), comes with specific warranties or promises for the buyer including the following items:
- The seller actually owns the property and has the right to sell it
- The property hasn’t already been sold to someone else
- The land is free and clear of all liens and debts (aside from those mentioned in the deed or the purchase agreement)
- The seller is responsible for any problems/faults with the property
The coverage period for this warranty extends for the entirety of the property’s existence. The warranties are not guarantees, but rather promises that in the event of a defect, the seller is responsible for the issue. Due to the nature of the promises, the seller could be in breach of contract for something that happened without their knowledge prior to purchasing the home. Because of this, title insurance is usually purchased to guard against potential liens and claims.
Special Warranty Deed
A special warranty deed (also known as a limited warranty deed or a grant deed) comes with all the protections of a warranty deed with one specific difference. It only guarantees a warranty for the time period in which the seller owned the property. Meaning, defects to the title that occured prior to the seller taking ownership are not covered.
Quit Claim Deed
In pretty sharp contrast, a quitclaim is a deed without covenants, warranties or extra protections. A quit claim deed simply states that the seller is transferring whatever ownership, if any, they have in the property to another.
You might think this sort of deed transfer sounds a bit risky in comparison to the others, and you would be correct! Most commonly, they are used in situations where there isn’t a true “sale” and no money changes hands—such as between family members or to move a property into a trust.
Mortgage Vs. Deed of Trust
Both a mortgage and a deed of trust are documents that hold a borrower accountable for the loan they took out to buy or refinance their home. The mortgage or deed of trust is recorded at the county and is the instrument wherein a lien is placed on the property—which gives the lender a right to sell your home if you default under the terms of the note you signed. However, there are two main differences between these documents:
Number of People Involved
A mortgage only involves two people: the borrower and the lender.
A deed of trust involves three different parties: the borrower, lender, and a trustee. The trustee is a third party who holds onto the property title, on behalf of the lender, until the loan is paid. If the borrower fails to make their payments, the trustee is in charge of kickstarting the foreclosure process.
What Happens if You Can’t Pay
Since a mortgage only involves two entities, the foreclosure process must go through the court system—also known as a judicial foreclosure. In these instances, the lender actually has to file a lawsuit and it can end up being fairly costly for both parties.
Due to this complication, some lenders will opt to use a deed of trust over a mortgage—provided you live a state where they allow them. With a deed of trust, the courts don’t need to be involved, which is also referred to as a non-judicial foreclosure. Since there’s no lawsuit, it tends be a cheaper and faster option for everyone involved.
Closing Disclosure Vs. Closing Statement
Both documents are given to a buyer before closing and summarize the final amount of money due. Up to this point, buyers rely on the loan estimate to plan costs. That’s why it’s important to compare the estimate and the final closing disclosure or statement side by side.
The Closing Disclosure or CD is a five page standardized form created by the CFPB that details your loan terms (unless you pay in cash), estimated monthly payments, and your final closing costs. Your lender is required to provide this document three days before closing, so you have enough time to ask questions and compare it to your loan estimate.
A CD is a requirement when you apply for most types of mortgage loans. Note: If you’re applying for a reverse mortgage, HELOC, or manufactured home loan, you’ll receive a HUD-1 statement, instead of a CD, and the three day disclosure requirement does not apply.
Closing statements are used in any situation where you aren’t mandated to use a closing disclosure or HUD-1. There’s no standardized form or good definition for how they need to look—some firms use an excel sheet while others send over a PDF with company letterhead.
Need a little more explanation? Here at Spruce, we welcome questions about the closing process and are happy to explain any requirements as they apply to your transaction. Get in touch with us here: firstname.lastname@example.org