Home Warranty

A policy agreement that protects against workmanship defects or materials relating to specific components provided in purchased homes

Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.

Start Free

Written by CFI Team

What is a Home Warranty?

A home warranty is a contract provided to the homeowner covering repairs and replacement services for a certain period of time. Home warranty requires a house buyer to comply with the maintenance schedule verified by periodic inspection from the contract’s date. It can be compared to a home insurance contract, which protects a home and its possessions against theft or damage.

Home Warranty

In the U.S., a home warranty does not explicitly convey a legal warranty. Rather, it is a home service contract that covers the majority of the components of a house, including the costs of replacement and repairs of household items and appliances.

Summary

A home warranty is a policy agreement that protects against workmanship defects or materials relating to specific components provided in purchased homes.
The warranty covers repairs and replacement of certain components, such as fixtures, fittings, and appliances included in a home.
Warrantors providing a home warranty may recommend a specific warranty provider company to render services to certain listed components.

How a Home Warranty Works

Buying a home is one of the biggest investments that an individual can make. Unfortunately, the management and maintenance history of a house may not be well known to the buyer. Information such as the age of useful appliances and their useful lifespan may be missing during the time of purchase. At the same time, searching for a home inspector or service provider may be time-consuming for the property owner.

The purchase of a home warranty comes in handy to alleviate time constraints and high costs of servicing a house before its acquisition. Essentially, a home warranty plan covers the systems of a home, such as electrical installation, and certain appliances including fridge and water heater repairs. A homeowner should closely examine a home warranty plan’s coverage and exclusions. Some conditions in the plan may need additional premiums to be covered in the maintenance schedule.

Home Warranty Companies

A home warranty company meets the costs required to maintain the functionality of a household system. A homeowner can purchase additional coverage for features not included in the initial home warranty.

However, it is important to note that some home warranty companies do not include some house components in their maintenance schedules. For example, some companies impose additional charges for outdoor pools, while other warranties include a pool in their maintenance services.

The warranty agreement may require the buyer to obtain a pre-approval for listed modifications – failure to which will void at least a portion of the warranty’s coverage. The contract may also require a buyer to use a designated warranty service provider for some of the listed repairs. Failure by the buyer to utilize the recommended home warranty service provider for any listed components can void the home warranty.

Filing a Home Warranty Claim

A homeowner is required to contact a home warranty service provider in the event of an appliance’s or system’s damage. The warranty company usually works with local home service providers to attend to customer claims. After reporting a claim, one of the partner providers is requested to assess the damage and produce a report that details the extent of damages and the underlying causes.

Thereafter, the warranty company ascertains whether the home warranty covers the identified system or appliance. A contractor is hired to replace or repair the damaged system if the warrantor approves the policyholder’s contract. The homeowner will be required to pay a small service fee to the contractor. Some states require newly-built homes to provide home warranties to buyers.

Home warranties for newly-built homes are different from home warranties for existing homes. The coverage may also differ, depending on the warranty provider company. The cost of a home warranty may be separate or included in the cost of a home.

In separate scenarios, the annual average cost of a home warranty ranges between $450 and $600. Additional coverage can cost between $100 and $500 depending on the type of service. However, it is recommended to get the home warranty included in the selling price so the buyer can pay the cost using the mortgage loan.

Home Warranty vs. Home Insurance

A home warranty and home insurance plan share similar features in liabilities, deductible premiums, and claims. Nevertheless, each of the two forms of warranties offers different services.

A home warranty assumes the maintenance and repair of breakdowns due to normal wear and tear. On the other hand, home insurance covers the losses or damages of the property itself, which may be caused by numerous natural disasters.

Special Considerations

The process of buying a home includes assessing maintenance costs for a plurality of home values from a database. The comparison of costs in the database and that of the home being purchased is used to project the repair and maintenance costs over a certain period.

The process may involve determining the cost of a home warranty based on the total projected repair and maintenance cost, entering into a warranty contract with the buyer, and entering into the agreement with the buyer to sell a newly-constructed house.

The contract warrants the plurality of the listed repairs and maintenance for some time. The home warranty also requires the buyer to adhere to the maintenance schedule. Such an approach may also require the buyer to contribute towards the transaction cost, which comprises the warranty cost and the property’s cost.