Home warranty basics, What every homebuyer should know, Buying a home, Property purchase advice

Everything you should know about home warranties guide

5 April 2024

When you buy a house, you may have the option to purchase a home warranty. And if you’re buying a new construction home, it may come with a warranty by default.

Warranties are important protective measures in a wide variety of industries, and they’re especially valuable to certain homeowners.

So what should the average person know about home warranties, and do you really need to purchase one?

Home Warranty Basics: What Every Homebuyer Should Know

Warranty Basics

Warranties come in many forms, but they always share some core similarities. Sometimes, purchasing a specific product will entitle you to a warranty on that product for free. Other times, you’ll need to purchase a warranty separately from a warranty company.

In housing, new construction houses sometimes come with warranties to assure homebuyers of the quality of the finished product. If you’re buying an existing home, you or the seller could buy a home warranty.

Either way, the warranty serves as a contract between the consumer and the warranty company. Depending on the specific language in this agreement, the warranty company will likely be responsible for fully replacing or repairing anything that goes wrong within the framework of the contract.

For example, a warranty may guarantee the safe and reasonable operation of the electrical work in the home for one year; if there are any issues with the electrical wiring during this time, you can file a claim, at which point the warranty company will conduct a short investigation and fix or replace the system.

Typical Home Warranties

It’s important to recognize that home warranties come in many different forms, so every contract is going to be different. However, there are some similarities worth exploring.

A home warranty usually covers the house for a period of one year or a few years. You’ll pay for the home warranty upfront, but you may also be responsible for paying for service calls if and when you need to file a claim. Home warranties typically have a deductible, like an insurance policy, which the homeowner is responsible for covering before the warranty company pays out.

In many cases, home warranty contracts cover groups of potential issues.

For example:

Structural/foundational. If there’s a crack in the foundation of the home, or if something happens to the structure, the warranty may kick in.
HVAC. Many home warranties cover heating, air conditioning, and ventilation systems.

Electrical. Electricity is vital for modern homes, but there are many things that can go wrong with it. That’s why many warranties cover electrical systems.
Plumbing. Plumbing system issues are also typically covered by home warranties.
Appliances. You can also have appliances covered in your home warranty, even beyond original manufacturer warranties.

Note that many home warranties don’t cover the following:

Preexisting conditions. If the condition existed in the home when you bought it, the warranty may not cover replacements or repairs associated with it. This is one reason why it’s important to do your due diligence before you finalize any real estate transaction.
Inappropriate installation. If something was installed in your home inappropriately, it may render part of your warranty void. For example, if you overload your electrical system with new appliance installations and the electrical system fails, your warranty may not cover it.

Misuse or intentional damage. Similarly, if you misuse things throughout your house or intentionally damage any part of your house, your warranty may not cover it.
Cosmetic issues. Most home warranties also do not cover purely cosmetic issues.
External damage and secondary damage. External sources of damage, like damage from pests, natural disasters, and vandalism, are typically not covered by warranties. These are more likely to be covered by your insurance policy.

Is a Home Warranty Worth It?

A home warranty, initially, is only a few hundred dollars, depending on the size and scope of your home. However, you may also be responsible for paying for service calls and up to your deductible.

Unfortunately, there is no one-size-fits-all answer here. Whether or not a home warranty is worth it depends on the nature of the home you’re buying, your personal risk tolerance, the scope of your warranty contract, and the specific costs you’ll be responsible for.

Protecting Your Home Investment

If you’re interested in protecting your home investment, these are the most important elements to consider:

The home inspection. Before finalizing any real estate transaction, you should follow through with a home inspection. This is your opportunity to better understand the structure and condition of your property, before you close the deal.

A home warranty. For many homeowners, a home warranty is worth the money, even if it’s only for peace of mind.
Home insurance. Every homeowner should have some kind of home insurance policy in place to protect them from catastrophic losses.
Routine maintenance and care. It’s also important to practice routine maintenance and care, so you can keep your house in much better shape long term.

Portfolio diversification. Your house shouldn’t be your only major asset. Consider diversifying your portfolio with investments in other asset classes as well.

Home warranties can be valuable, but they don’t cover everything and they aren’t a good fit for every homebuyer. Before you decide whether to move forward with a home warranty, you should do your homework and work to improve your understanding of how this contract fits your needs, specifically.

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