How does a home warranty work during the real estate buying process?

When navigating the real estate buying process, one term that often arises is home warranty. While it might sound similar to home insurance, a home warranty serves a distinct purpose and offers unique benefits to both buyers and sellers. Understanding how a home warranty works during a real estate transaction is key to protecting yourself from unexpected repair costs. In this guide, we’ll break down how home warranties fit into the real estate transaction process, address common questions, and clarify who typically pays for them. 
 

What is a Home Warranty in Real Estate?

A home warranty  is a service contract that covers the repair or replacement of major home systems  and appliances  that may break down due to normal wear and tear. Unlike homeowner's insurance, which protects against unexpected disasters like fires or floods, a home warranty works by covering failures of everyday components such as HVAC, plumbing, electrical systems, and major appliances like refrigerators, ovens, washers, and dryers..

For homebuyers, a warranty can provide peace of mind knowing they won't face significant repair costs shortly after moving in. For sellers, offering a home warranty can make their home more appealing and reduce disputes during inspections.

How a Home Warranty Works in a Real Estate Transaction

A home warranty works by providing repair or replacement service once a covered system or appliance fails. Here’s a simple breakdown of how the process works for buyers:

• Coverage Begins — Coverage typically starts on the day of closing, unless the seller purchased listing-period coverage.
• A Covered Item Breaks Down — When a system or appliance fails due to normal wear and tear, the homeowner submits a service request.
• Service Fee Is Paid — The homeowner pays a service fee (usually $65–$125 depending on the provider).
• Technician Dispatch — The home warranty company assigns a licensed technician from their network.
• Repair or Replacement — If the issue is covered, the technician will repair the item or recommend replacement if it cannot be fixed.

What is a Home Warranty Deed?

The term home warranty deed is often confused with a traditional home warranty, but they are not the same. A warranty deed is a legal document used in real estate transactions to transfer property ownership from the seller to the buyer. It guarantees that the seller holds a clear title to the property and has the legal right to sell it.

A home warranty, on the other hand, is not a legal document but rather a service agreement. While both terms involve assurances during the real estate process, they serve very different purposes.

Is a Home Warranty Required at Closing?

No, a home warranty is not legally required at closing. However, it is often included as part of the negotiation process. Some sellers may offer to include a home warranty as an incentive to attract buyers, while buyers can also request one during negotiations.

In competitive markets, sellers sometimes pre-purchase a home warranty to make their listing more attractive. Conversely, in buyer’s markets, buyers may ask sellers to cover the cost of a home warranty.

Who Pays for the Home Warranty: Buyer or Seller?

The responsibility for paying for a home warranty depends on the terms negotiated in the sales contract. There are generally three scenarios:

1. Seller Pays: Sellers may offer to cover the cost of a home warranty as an incentive for buyers.
2. Buyer Pays: Buyers may choose to purchase a home warranty themselves after closing.
3. Split Costs: In some cases, the cost may be shared between the buyer and seller as part of the closing agreement.

It’s essential to clarify this detail in the purchase agreement to avoid confusion later in the transaction.

Who Pays for a Home Warranty at Closing?

If the home warranty cost is included in the sales contract, it is typically paid as part of the closing costs. This means the title company or escrow agent will collect the funds at closing and ensure the warranty policy is activated.

If the buyer chooses to purchase a home warranty independently after closing, they will handle the payment directly with the home warranty company.

What is a Home Warranty for Buyers?

A home warranty for buyers provides protection during the crucial first year of homeownership. Coverage typically begins at closing and includes:

• Repair or replacement of covered systems
• Protection from unexpected costs
• Peace of mind during the transition into the new home
• Optional upgrades for additional coverage

Many sellers offer buyer coverage because it reduces the chances of a post-closing dispute.

How Does a Home Warranty Work for the Seller?

A seller’s home warranty works by protecting the homeowner during the listing period and making the property more attractive to buyers. Here's what sellers should know:

• Listing-Period Coverage: Many warranties include free or low-cost seller’s coverage while the home is on the market.
• Covers Systems During Listing: If a covered system fails before closing, the seller pays only the service fee, avoiding unexpected costs.
• Reduces Delays: Warranty coverage helps prevent last-minute repair negotiations that can jeopardize the sale.
• Marketing Advantage: Including a home warranty shows buyers the home has been well cared for and adds confidence to the transaction.
• Easy Transfer: The warranty seamlessly transfers to the buyer at closing.

In short, this is how a home warranty works for the seller: it reduces liability, boosts buyer trust, and helps homes sell faster and smoother.

Can I Buy a Home Warranty After Closing?

Yes, you can buy a home warranty after closing. Many warranty providers allow homeowners to purchase a policy at any time, regardless of how long they’ve owned the home. However, buying a warranty during the closing process is often more convenient, as the costs can be rolled into the transaction.

If you’re buying a warranty post-closing, be sure to research providers, compare coverage options, and ensure you’re aware of any waiting periods or exclusions.

How to Get a Home Warranty When Buying a House?

To secure a warranty:

1. Check if the seller is offering one.
2. Negotiate coverage in the contract if not.
3. Compare multiple providers and coverage levels.
4. Time activation to begin at closing.
5. Review terms, exclusions, claim processes, and coverage limits.

Some companies offer special home-buyer discount programs or enhanced protection for newer homes.

Benefits of a Home Warranty During the Real Estate Process

• Peace of Mind: Buyers gain confidence knowing they are protected against costly repairs.
• Increased Marketability: Sellers can make their property more attractive by offering a home warranty.
• Budget Protection: Unexpected repair costs can strain a new homeowner's budget. A warranty offers predictable expenses.
• Smoother Negotiations: Including a home warranty can ease tensions during inspection contingencies and repair negotiations.

Key Considerations When Choosing a Home Warranty

When selecting a home warranty during the real estate process, consider the following factors:

• Coverage Scope: Ensure major systems and appliances are covered.
• Exclusions: Review what is not covered under the warranty.
• Contract Terms: Understand service fees, deductibles, and claim limits.
• Provider Reputation: Look for providers with good reviews and responsive customer service.

Most real estate home warranty plans last 12 months, beginning on the closing date.

Buyers can renew year-to-year, and sellers typically use short-term listing coverage until the home sells. 

While a home warranty isn’t required during the real estate buying process, it’s often a valuable tool for both buyers and sellers. Whether included in the sales agreement or purchased independently, a home warranty can offer peace of mind and financial protection against unexpected repairs.

Buyers should carefully review their home warranty options, and sellers should consider whether including one could give their property a competitive edge. In the end, a home warranty is about protecting your investment and ensuring your homeownership experience starts off on the right foot.