Key takeaways:
Whether you are a new homeowner or simply moving to a different state, the ins and outs of home warranty coverage can be challenging to navigate.
When considering adding a home warranty while applying for a mortgage or buying a home, it can give you confidence to be aware of the regulations governing home warranties specific to your state.
Why should you want a home warranty at all? In addition to giving you peace of mind and helping you avoid unexpected expenses; a home warranty can also make your home more appealing in a competitive housing market to prospective buyers.
Let’s review the rules around home warranties so you can make an informed decision and find a plan that best fits your needs.
Is home warranty required by any law?
No, no law in any state currently mandates home warranty coverage. The rules surrounding what home warranty plans may provide and who regulates the home warranty companies varies form state to state. Some states do require home builders provide a builder's warranty or the equivalent for the first year, or so.
Before we continue, let’s define what a home warranty is.
Home warranties are service contracts that help you cover the cost of repairing and replacing faulty home systems and appliances that break down due to normal wear and tear. You’ll pay a monthly or annual premium for coverage and a deductible when it’s time to make a claim.
Now that we’ve covered that, here’s what you should know about how home warranties are regulated.
1. There are three tiers per say: National regulations, state regulations and industry-based regulations.
2. The service contract industry has a model act that is in place in several states, but not all states have adopted the same regulations.
3. The Federal Trade Commission (FTC) ensures companies follow regulations and aims to protect consumers from companies that use false advertising and unfair tactics.
4. Some states will regulate home warranties through the Department of Insurance. This does not mean that a home warranty works the same as homeowners insurance in those states.
5. The home warranty industry has two primary self-regulating sources; the Service Contract Industry Council (SCIC) and the National Home Service Contract Association.
Do states require home warranty plans?
Although not required, it is essential to understand some of the key differences that can arise in different states around home warranty coverage.
Some states, such as Illinois and California, regulate their home warranty coverage through the Department of Insurance. Other states, such as Texas, regulate the rules that govern home warranty coverage through the Department of Licensing and Regulation.
Despite states differing in specific rules, there are certain consumer protections that most states have for home warranty companies:
- Financial security: Home warranty companies are audited regularly for proper reserves. This means you're not wasting your money — you'll get the services you paid for.
- Transparency: This means no hidden fees or surprise clauses. Remember that you still have to read the fine print to find all the terms and conditions.
- Consumer protection: Regulations aim to protect you from scams and fraudulent practices. If a company doesn't meet the set standards, it can't operate.
- Legal recourse: If a company tries to scam consumers, regulations provide a framework for legal action.
- Standardized practices: States standardize practices to make it easier for consumers to compare companies and receive similar offerings.
- Distinguished from insurance: Regulations mandate that home warranty companies differentiate themselves from insurance companies as service providers.
Is home warranty required for mortgage applications?
Home warranty coverage is not required for mortgage applications and is often confused with homeowners insurance. Knowing the difference between homeowners insurance and home warranty coverage is essential.
Home warranties cover repairs and maintenance of home systems and appliances due to wear and tear, while homeowners insurance covers catastrophic events like fires, theft, and natural disasters.
Homeowners insurance is often mandatory for a mortgage, covering significant damages and theft. Home warranties are optional, addressing repairing or replacing appliances and systems due to age or usage.
Is a home warranty required at closing (buying or selling)?
The real estate market fluctuates and can be hard to predict. Statista said five million housing transactions were completed in 2022, down from 6.12 million in 2021.
Although home warranty plans are not currently required for mortgages, they make your home more attractive to prospective buyers. One danger of buying an existing home is that systems and appliances have an unknown level of wear and tear. A home warranty plan gives the buyer added peace of mind.
When is home warranty required?
As stated above, federal and state laws do not mandate home warranty coverage. Although not required, having the right home warranty coverage may result in significant savings when your home breaks down.
With Cinch Home Services, you'll get excellent customer service, a network of service technicians you can trust and options that fit your budget and needs. To learn more about the different plans* you can choose from, click here.
* Subject to plan terms and conditions.
*The information in this blog library is intended to provide general guidance on home warranties, and on the proper maintenance and care of systems and appliances in the home. Not all of the topics mentioned are covered by our home warranty or maintenance plans. Please review your home warranty contract carefully to understand your coverage.
*Our blog library may link to third-party sites that offer products, services, coaches, consultants, and/or experts. Any such link is provided for reference only and not intended as an endorsement or statement that the information provided by the other party is accurate. We are not compensated for any products or services purchased from these third-party links.