- A warranty deed protects the buyer of real estate, and is usually required by a mortgage lender before they will finance a transaction. By making explicit certain claims and promises, the seller is in effect assuring the buyer that the transaction will be legal, proper and uncontested.
- In addition to establishing the seller as the legal owner of the property with the right to sell it, a warranty deed also states that there are no liens or encumbrances on the property other than those that may have already been discussed with the buyer. The seller also promises to defend the buyer if any claims against the seller's title arise after the transaction.
- Establishing a seller's lawful right to sell a property is a crucial part of a transaction, especially since real estate is so often used as collateral against various types of loans. The warranty deed offers peace of mind to the seller that once they buy the property, unpaid secured creditors are not going to enjoin the property and take it from under them to settle the seller's debts.
- The covenants made in a warranty deed aren't just taken on the word of the seller. Before a warranty deed is executed the title of the property is researched, usually by a professional title company, not just during the period during which the seller owned the property, but going back as far as possible. It is really this research by the title company that backs the warranty deed, and its enforceability in court that makes it binding.
- Nevertheless, some mortgage lenders seek to protect themselves even further by forcing a potential buyer to take out title insurance on the property. If there was a defect in the title and another entity could validate their claim, the buyer would suffer the loss and the mortgage company would lose the collateral backing their loan. Title insurance compensates the buyer in the event of a defective title, allowing them to at least pay off the mortgage lender.