Purchasing a home with a mortgage loan involves a vast amount of paperwork. While each document is important in its own right, your warranty deed and deed of trust are two of the most important – albeit sometimes confused. They serve different purposes and are signed by different parties. The warranty deed transfers the property's ownership from the current owner to the new buyer, while the deed of trust ensures the lender has interest in the property in the event a buyer defaults on the loan. However, they will both be filed as public records after the purchase is complete.
Warranty deeds and deeds of trust are integral to the home-buying process, but have different purposes. A warranty deed transfers ownership from the old owner to the new, and a deed of trust gives the lender interest in the property should you default on the loan.
Understanding Warranty Deeds
Warranty deeds are commonly used in many states when a property is sold. The warranty deed offers a guarantee to the buyer that the seller rightfully owns the property free and clear of any liens or other defects to the title. The deed states the names of the grantor and grantee and also includes a complete legal description of the property. The grantor signs the deed, generally in the presence of a notary public, who then acknowledges the grantor's signature. Depending on state law, other information, such as the name of the person who prepared the deed, might appear on the document as well.
Exploring Deeds of Trust
The deed of trust document is prepared by the lender, and the borrower signs it at the closing of the mortgage loan. Some states use the deed of trust, while others use a mortgage document. Both of these act as the lender's security instruments, only slightly differently. The deed of trust explains the complete details, terms and conditions of the mortgage loan. This includes the principal balance amount, expected maturity date and interest rate information. It also names a third-party trustee who is empowered to initiate the foreclosure process for the lender, if necessary. A mortgage document also explains the loan in detail, but it acts to place a lien on the property rather than naming a third-party trustee.
Differences Between the Two
The warranty deed acts to transfer property ownership from the current owner – the "grantor" – to the new buyer, the "grantee." By signing the deed, the grantor gives his rights to the property to the grantee. A deed of trust is a type of lending document stating the borrower's evidence of debt. The document secures the lender's interest in the property by naming a "trustee" – a third party who has the right to sell the property should the buyer default. For example, when you purchase a house, the seller signs a warranty deed granting you ownership. You then sign the deed of trust as a promise to repay the lender for the loan.
Filing the Deeds
After both the warranty deed and deed of trust have been signed, they are presented to the county clerk or recorder to be filed. It is important that these documents are properly recorded, which the lender or a title insurance company usually verifies. The warranty deed records the buyer as the new property owner. The deed of trust proves evidence of debt in favor of the lender. It remains as an active record until the loan is paid off. At this point, the lender will draft some type of document such as a satisfaction or release stating that the loan is paid in full.