Home Warranty vs. Home Insurance: What's the Difference?

Home warranty and home insurance sound similar, but they play very different roles in an Ohio home purchase. One can be required by your lender. The other is usually optional. Understanding the difference helps you avoid surprises before closing and after you move in.

At Western Ohio Mortgage, we often see this come up when buyers are reviewing purchase contracts, seller concessions, escrow accounts, and closing disclosures. The mortgage approval is not based on whether you buy a warranty, but homeowners insurance is a key part of the loan file.

Homeowners insurance protects against covered damage

Homeowners insurance generally protects the property from covered events such as fire, wind, hail, theft, and certain liability risks, depending on the policy. In western Ohio, buyers should pay close attention to wind and storm coverage, deductibles, replacement-cost assumptions, and whether the home has any features that affect insurability.

If you are using a mortgage, your lender will typically require acceptable homeowners insurance to be in place by closing. The annual premium may be paid at closing, and monthly escrow payments may be collected with your mortgage payment for future taxes and insurance, depending on your loan structure.

A home warranty is usually a service contract

A home warranty is different. It is commonly a service contract that may help pay for repairs or replacement of certain systems and appliances when they fail from normal use. Coverage varies widely. Some warranties include HVAC, plumbing, electrical, water heaters, kitchen appliances, or optional add-ons. Others exclude older systems, pre-existing conditions, or certain types of repairs.

A seller may offer a warranty as part of the purchase agreement, or a buyer may choose to purchase one separately. The warranty can be useful, especially for an older home, but it should not be treated as a substitute for a strong inspection or good homeowners insurance.

How this affects your mortgage closing

For loan approval, the lender is mainly concerned that the collateral is protected by acceptable insurance and that the final payment fits your qualifying numbers. A home warranty may show up as a contract item or closing cost, but it is not the same thing as the required hazard insurance policy.

• Ask your insurance agent for a quote early so the payment estimate is accurate.
• Read the warranty limitations before counting on it for an expensive repair.
• Use the inspection report to decide whether a warranty is meaningful for the home.
• Tell your loan officer if a seller credit or warranty payment is added to the contract.

If you are planning an Ohio home purchase, our loan process overview explains how the mortgage pieces come together. You can also start with the Ohio first-time home buyer resource if this is your first purchase.