Is a Home Warranty Required at Closing?

A home warranty is a service contract designed to cover the repair or replacement of major home systems and appliances that fail due to normal wear and tear. This coverage typically extends for a one-year period.

Understanding Home Warranties

A home warranty functions as a service contract, providing financial protection against unexpected costs when covered home systems and appliances break down from regular use. Homeowner’s insurance is typically required by lenders, whereas a home warranty is optional.

Common items covered by a home warranty often include major systems such as heating, ventilation, and air conditioning (HVAC), plumbing, and electrical systems. Many plans also cover kitchen and laundry appliances like refrigerators, ovens, dishwashers, washing machines, and dryers. However, home warranties usually have exclusions, such as pre-existing conditions, damage from improper maintenance, cosmetic issues, or items still under manufacturer’s warranty. Third-party warranty companies offer these contracts, and they can be purchased by buyers, offered by sellers as an incentive, or sometimes even gifted by real estate agents.

Requirement Status

A home warranty is not a legally mandated requirement for home closing in the United States. Its inclusion in a home sale is a matter of negotiation between the buyer and seller, or a voluntary choice.

Sellers may offer a home warranty to make their property more appealing to potential buyers and to provide reassurance regarding the condition of the home’s systems and appliances. Buyers may request a home warranty as part of their purchase agreement to mitigate the risk of unexpected repair costs shortly after moving in.

Lenders do not typically require a home warranty for loan approval. However, some may suggest it as an added layer of protection for the property’s value, especially for certain loan types. It is not a condition for obtaining an FHA or VA loan for existing homes.

Real estate agents also recommend home warranties to help facilitate smoother transactions and reduce potential post-closing disputes over appliance or system breakdowns.

Integration into Closing

If a home warranty is agreed upon as part of the real estate transaction, its details will be documented during the closing process. This agreement is reflected in the purchase contract. The cost of the home warranty will then appear on the Closing Disclosure (CD).

The manner in which the cost is handled varies depending on the negotiation. If the seller agrees to pay for the home warranty, the cost will be listed as a charge on the seller’s side of the Closing Disclosure. Conversely, if the buyer is responsible for the cost, it may appear as a line item on the buyer’s side of the Closing Disclosure, or the buyer might pay the warranty company directly. In some instances, the cost might be negotiated as a split between the buyer and seller.

While the financial aspect of the home warranty is noted on the closing documents, the actual warranty contract and policy documents are provided directly by the home warranty company to the homeowner after closing. Homeowners should expect to receive these policy documents and understand the activation process and how to file a claim once they take possession of the home.