What Is a Home Warranty at Closing?

A home warranty is a service contract designed to cover the repair or replacement of major home systems and appliances. This contract offers buyers and sellers a layer of financial protection in real estate transactions. It is important to understand that a home warranty is not a form of insurance, but rather an agreement to service specific components within a home. Including a home warranty at closing can provide peace of mind regarding potential unexpected repair costs.

Understanding a Home Warranty

A home warranty is a service contract that covers the repair or replacement of major home systems and appliances that fail due to normal wear and tear. This contract is typically for a one-year term, protecting homeowners from potentially high repair costs associated with sudden appliance breakdowns and system failures. Common items covered include heating, ventilation, and air conditioning (HVAC) systems, plumbing, and electrical systems. Many plans also cover kitchen appliances such as ovens, ranges, stoves, cooktops, dishwashers, built-in microwaves, and garbage disposals. The specific coverage can vary significantly depending on the plan and provider chosen.

There are common exclusions and limitations within home warranty contracts. Issues arising from pre-existing conditions, improper maintenance, or installation are typically not covered. Cosmetic defects, structural components like walls or windows, and items covered under a manufacturer’s warranty are also generally excluded. Contracts also specify limitations on replacement costs and may have aggregate claim limits.

A key distinction exists between a home warranty and homeowner’s insurance. Homeowner’s insurance primarily covers sudden, accidental damage from perils such as fire, theft, or storms, and also provides liability protection. Conversely, a home warranty addresses failures due to normal wear and tear of systems and appliances. These two types of coverage are distinct and often complement each other, as home warranties fill a gap not covered by standard homeowner’s insurance policies.

When a covered item requires service, the homeowner is typically responsible for paying a service fee, sometimes called a trade call fee or deductible. This fee is paid each time a service technician is dispatched to the home for a covered repair. These service fees commonly range from $75 to $125 per visit.

Home Warranties and the Closing Process

Home warranties are frequently discussed and negotiated during a real estate transaction. They offer peace of mind to buyers by protecting against unexpected repair costs shortly after moving into a new home. For sellers, offering a home warranty can act as an incentive or a concession to address buyer concerns, potentially making the property more attractive and facilitating a smoother sale.

The responsibility for payment of a home warranty varies in different scenarios. Often, the seller pays for the home warranty as a marketing tool or to address issues identified during a home inspection. Buyers may also choose to purchase a home warranty for their own protection, either directly or through their real estate agent. In some instances, the cost may be shared between the buyer and seller as part of the negotiated agreement.

The arrangement for a home warranty is often facilitated by real estate agents who may have relationships with various warranty providers. Buyers and sellers can also directly engage with warranty companies to choose their preferred provider and plan. The average annual cost for a home warranty typically ranges from $350 to $700, though more comprehensive plans can be higher.

When a home warranty is included in the real estate transaction, its cost will typically appear on the Closing Disclosure (CD) or HUD-1 statement. This document clearly details the financial aspects of the transaction, including who is responsible for paying the home warranty premium. If the cost is included in the sales contract, the title company or escrow agent will collect the funds at closing to ensure the policy is activated.

While a home warranty is not legally required at closing, it is a common element of negotiation. Sellers sometimes pre-purchase a home warranty to enhance their listing’s appeal. Buyers may also request one during negotiations, particularly in competitive markets or when purchasing an older home.

Activating and Utilizing Your Home Warranty

Once a home warranty is secured, coverage typically begins on the closing date or shortly thereafter, once the policy is activated. Some providers may have a short waiting period, such as 30 days, before certain claims can be made, so reviewing the specific policy terms is important. Activation usually involves registering the policy online or confirming contact and property details with the warranty company.

When a covered system or appliance breaks down, filing a claim involves a clear, step-by-step process. The homeowner initiates a service request by contacting the warranty company, often through an online portal, phone, or mobile application. It is important to clearly describe the problem when submitting the request.

Upon dispatch of a service technician, the homeowner will pay the required service fee. This fee covers the technician’s visit and diagnosis of the issue. The warranty company then typically selects a qualified service contractor from its network to assess and address the problem.

Following the assessment, the technician will either repair the item or, if repair is not feasible or cost-effective, recommend its replacement. In some cases, the warranty company may offer a cash-out option in lieu of repair or replacement. It is important for homeowners to thoroughly review their specific policy contract to understand claim limits, specific exclusions, and the exact claims procedure.