I’m all about organization – labels, reusable containers, and keeping things neat and tidy. Often you might hear about a binder when you are a home buyer? What is a Binder in Real Estate? Do you need to make one for organization? Actually, the real answer is very different than you think!
Real Estate Transactions are complicated! To make it even harder each state has its own rules and regulations.
There are many different ways the term binder is used in a transaction. In some areas, A binder is an informal agreement to move forward with a transaction. It is NOT a contract to purchase a property, rather it is a non-binding agreement. It may also have a transfer of money to hold the property.
In other areas, a binder deposit is an earnest money deposit that the title company collects as part of the sale.
In this article, I’ll go over the different kinds of Real Estate Binders and hopefully answer some of your questions.
The four different kinds of real estate binder are:
- Insurance Binder
- Title Binder
- Binder Deposit
- Property Insurance Binder
What is an Insurance Binder?
When you are buying a house and getting a mortgage, you will need to prove that you will have home insurance. The lender will require this with a mortgage The Insurance agent will create an insurance binder to prove that they will have the needed coverage. You don’t actually have coverage yet, because they don’t own the house. Why insure something you don’t have?), but everything is in place for when the purchase happens. Basically, it is proof of insurance.
Sometimes there is a deposit amount that needs to be paid, but this is very uncommon.
What is a Title Binder?
There are actually a few different types of title binders, depending on which state you are in.
One type of title binder is a way for someone to pay for the title work to be done on the house once, and then, re-used again on the same property a short time later. Let me explain.
When a person is buying a house a title search is performed. This is a required step by title companies to look for defects in the title abstract. It is now done online. In the past it was to look for public documents at the courthouse.
Basically, the title company makes sure that the people selling the home have the right to do so. Also that there are no other parties with an interest in the house.
If that first buyer is a renovator or real estate investors who are not going to own the home for a long period of time, but instead fix it up and then sell it a few months later, why would a new title search need to be done in such a short time?
This is where the title binder comes into play. There should be no new unknown defects in the title, the old one can be reused after a quick “binder check”.
Another type of title binder is simply a commitment to issue a title insurance policy from a title insurance company.
What is an Insurance Binder in Real Estate?
During the purchase of a property, there may be a time when there is a gap in insurance coverage.
For instance when the closing date for each party doesn’t align. This can happen when a seller signs away their rights to a house, and then a few days later the buyers sign the paperwork and take the house into their own possession. During that window, a title company may require an interim binder to be put in place so the property is covered in case something happens.
This home insurance binder is a temporary short-term insurance policy. Note- these usually have a higher premium or additional cost of coverage.
Should I Sign a Binder and Hand Over a Deposit?
In some areas, it may be necessary to sign a binder and hand over a deposit before you go see a property. This binder fee is an informal agreement that a buyer is interested in a property, but it is not a contract to purchase it. The binder may become a contract if all parties agree to the sale terms. The deposit may be used for the contract or returned based on the different terms of the binder.
These binders do not enhance the contract, nor do they increase a buyer’s home purchase chances.
These real estate binders are legal documents, and typically have details like the purchase price, down payment amounts, who pay title fees and all the other important details. But again, it isn’t a formal contract of sale. A Real estate contract will still be still drawn up during the times mentioned in the language of the binder if the parties want to move forward during the standard timeframe allocated.
As always Real Estate Agents are your best source of info for what binder you might need. If they start to talk about highlighters, and college-ruled paper, you might want to find an agent with a bit more experience. There are so many different real estate markets, be sure you know what you are getting into, and get the help you need.