What Is a Home Warranty?

It’s normal to worry about what could go wrong when you buy a home. They’re complicated structures with lots of moving parts that are aging at different rates. And sometimes, the older the house, the bigger the worry. Many homeowners find solace in the warm embrace of a home warranty, either one their realtor’s brokerage offers or one the home seller provides.

But what is a home warranty, and what kinds of things does it cover?

What Is a Home Warranty?

Both buyers and sellers in real estate transactions are often offered home warranty options for their properties. These offer protection should major problems arise in the home’s systems. It’s not insurance, exactly, but it acts a lot like it.

“A home warranty is a contract that offers coverage for a specific set of repairs,” Sam Thomas, Realtor with Providence Group Realty in Plano, Texas, says.

“While it is not insurance, it feels like insurance in many ways along with a deductible, coverage limitations and exclusions. Covered items generally include plumbing, electrical, appliances, and HVAC. Additionally, many companies offer extended coverage for pool equipment and other items such as an extra fridge in the garage,” he says.

[See: Best Homeowners Insurance Companies]

How Is a Home Warranty Different From Other Warranties or Insurances?

When you’re buying a home, things happen fast. And it’s easy to get confused because a lot of things you need either seem similar or have similar sounding names. When it comes to insurance and coverages, both of those things can happen at once. For example, many first-time buyers may confuse home warranties with homeowners insurance, and although they sound alike, they’re very different.

“Unlike homeowners insurance, which protects you from the costs of damage to or destruction of your home, a home warranty protects you financially from repairing appliances and key mechanical components in your home, like the hot water heater and air conditioning units,” Travis French, Realtor and founder at First&Sold in Las Vegas, Nevada, says.

“There are two ways to acquire a home warranty, through escrow upon closing or directly with the home warranty company after closing.

“The advantage of a home warranty during the real estate transaction is that the plan goes into effect immediately. In contrast, plans signed up for after closing typically have a one-month grace period before a claim can be filed.”

Home warranties are also different from the warranty you’d get when buying a new home. Although those homes are generally under a warranty, the warranty you receive comes directly from the builder, as well as the manufacturers of the materials your builder used.

“A builder’s warranty is provided for new construction homes,” Yolanda Muckle, Realtor at Long & Foster in Largo, Maryland, says. “It typically covers the workmanship of major structural elements of a new home.”

[READ: Should You Buy a New Build or Previously Owned Home?]

How to Choose a Good Home Warranty

Many home buyers or sellers don’t realize they have a choice in home warranties and generally op for whatever their Realtor or brokerage offers — or the one that randomly shows up with an offer in their mailboxes.

This can be a fine way of approaching things if you just want very basic coverage. But there are lots of home warranty companies out there, and if you do a little research you’ll likely find the ideal one for your situation.

“The two most important items to consider when buying a home warranty are limits and exclusions,” Ron Leffler, broker at Ron Leffler Real Estate in Alexandria, Virginia, says.

“Limits are the maximum the warranty will pay for a particular item. Let’s say you have your water line covered under your policy and it needs replacement. The policy covers replacement but has a $2,000 cap on this item and the vendor is quoting $5,000 for this repair. The policy is limited at $2,000, so you are on the hook for the additional $3,000.

“Exclusions are the ones that really sting. These are the specific items that are not covered despite the larger category being covered. For example, your HVAC system is a covered category under your policy. Yours isn’t working one day, so you call to make a claim. The technician discovers you need a new condensate pump, which is specifically excluded under your policy. You’ll be responsible for 100% of the costs associated with that repair and the warranty company will not cover anything as it is an excluded item,” Leffler says

The lesson here? Make sure you know what you’re buying when you sign up for a home warranty. What they offer and what they exclude can range pretty widely between companies and it’s best to know upfront what you’ll be responsible for paying out of pocket.

Home Warranties Help Both Buyers and Sellers

Despite the known shortcomings of home warranties, they can be important components in a home sale, especially if you’re trying to buy or sell an older home that may have older systems like HVAC, electrical or plumbing.

These can be serious concerns for new buyers, since they have no way to know if these big-ticket items will fail while they’re still trying to settle into their new home. A seller offering a home warranty can and should influence a buyer’s decision for the better.

[READ: Should You Use a Buyer’s Agent?]

“As a seller, offering a home warranty to a buyer helps to ease their concerns during the home inspection and repair request process,” French says. “This potentially saves money on repairs and reduces the risk of cancellations.”

In other situations, providing a home warranty offers a lot more than peace of mind — it could protect a seller from more serious consequences such as litigation.

“It is to a seller’s advantage to offer and pay for a buyer’s home warranty,” Thomas says.

“For example, a buyer closes on their home and three months later the water heater goes out. The buyer wonders if the seller knew there were issues prior that were not fully disclosed and is determined to take action against the seller. If the seller had purchased a home warranty for the buyer, it would show good faith on behalf of the seller along with actually covering the repair or replacement of the item.”

Of course, a seller providing a homebuyer a warranty isn’t the only way home warranties can work to the benefit of a real estate transaction. Sellers can also purchase them when they list their homes, and in some cases, the home warranty will cover necessary repairs to the home while it’s listed.

“While your home is listed for sale, a home warranty will provide peace of mind if something breaks while the home is on the market,” Muckle says.

“Additionally, you can transfer it to the buyer when the home sells. I’ve had homeowners who purchased a home warranty when they listed their home for sale. When the home inspection came back, they were able to get some of the items repaired through the home warranty.”

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What Is a Home Warranty? originally appeared on usnews.com

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