Who Pays for Home Warranty at Closing?

A home warranty is a service contract that provides for the repair or replacement of major home systems and appliances that may break down due to normal wear and tear. This contract is distinct from standard home insurance and is often a consideration during a real estate transaction. Its purpose is to offer financial protection against unexpected repair costs for covered items after a property changes hands.

Understanding Home Warranties and Closing

A home warranty offers coverage for home components, such as heating, ventilation, and air conditioning (HVAC) systems, plumbing, electrical wiring, and major appliances like refrigerators, ovens, and washers. Unlike homeowner’s insurance, which protects against disasters like fires, floods, or theft, a home warranty is optional. Homeowner’s insurance is often mandatory for mortgage lenders, while a home warranty addresses issues from everyday use and age, not sudden damage.

Including a home warranty in a real estate transaction provides security for both parties. For buyers, it protects against expensive repairs shortly after moving in. Sellers find it an attractive incentive, making their property more appealing or minimizing liability for post-sale issues. This protection reduces financial uncertainty during homeownership transition.

Typical Scenarios for Payment Responsibility

The responsibility for paying for a home warranty at closing is a negotiable item in real estate transactions. While not legally required, it is frequently included as part of the purchase agreement. Who pays depends on market conditions, negotiation strategies, and sale circumstances.

Sellers often offer to pay for a home warranty as a concession or incentive, especially in a buyer’s market with more housing inventory. This alleviates buyer concerns about older appliances or systems, making the property more attractive. A seller might also purchase a warranty to cover their liability for breakdowns during the listing period and transfer it to the buyer at closing. These seller-paid warranties often cost between $300 and $700 annually for basic coverage.

Conversely, buyers may pay for a home warranty themselves, even if the seller does not offer one. This decision is driven by a desire for protection against unexpected repair costs after closing, especially when purchasing an older home. In competitive seller’s markets, buyers might pay for the warranty to make their offer more appealing without asking for seller concessions.

The average annual cost for a home warranty ranges from approximately $220 to $1,900, depending on the breadth of coverage. In some transactions, the cost of a home warranty may be split between the buyer and the seller as part of the overall closing agreement. Real estate agents sometimes also provide a home warranty as a gift to their clients, a practice that can protect the transaction and their clients from future issues.

Negotiating Payment

Who pays for a home warranty is an integral part of the real estate negotiation process. It is a flexible item discussed and agreed upon by the buyer and seller. Real estate agents advise clients on whether to request or offer a home warranty, often based on market trends and property condition.

The agreement regarding home warranty payment is typically formalized within the sales contract or purchase agreement. This document states which party is responsible for the cost, ensuring clarity before closing. While a home warranty can be a bargaining tool, its inclusion and payment responsibility are subject to the mutual consent of the buyer and seller.

Recording on the Closing Disclosure

When a home warranty is part of the real estate transaction, its cost is typically itemized on the Closing Disclosure (CD). The Closing Disclosure is a standardized form providing a detailed breakdown of all costs and credits associated with the real estate transaction. On this document, the home warranty charge is allocated to either the buyer or seller, depending on negotiated terms.

If the home warranty cost is included in the sales contract, the funds are collected at closing by the title company or escrow agent, ensuring the policy is activated. However, if purchased independently by the buyer after closing, or gifted by a real estate agent, it may not appear on the Closing Disclosure. This documentation ensures transparency regarding all financial aspects of the real estate settlement.