What Is a Title Binder?
A title binder is a temporary form of real estate insurance coverage related to the transfer of ownership. A title binder is typically used to protect both the seller and buyer of a real estate property during the transitional phase of a sale when the seller's and buyer's home insurance policies do not necessarily overlap over the same time frame. Although they are not legally required in all cases, title binders are common protective insurance in real estate transactions.
- Title binders are temporary is a form of temporary real estate insurance used during ownership transfer.
- Title binders protect the buyers and sellers during transfer—i.e. times when there might be a gap in the buyer's or seller's home insurance policy.
- Title binders, while not always legally required, are often required by many real estate agents.
- Typical title binders will provide protection from things, such as acts of God, and other sorts of physical damage during the closing of a property transaction.
- A title binder, however, is not a title insurance policy.
How a Title Binder Works
Title binders may be considered vital in some jurisdictions prior to real estate agencies agreeing to list a property or close a sale. Typical title binders will provide the buyer and seller protection from theft, acts of God, and other sorts of physical damage during the closing of a property transaction.
A title binder, or interim binder, is not a title insurance policy. However, it does represent an insurance company's commitment to issue a title policy. The key to the question of buying or not buying a title binder is the amount of time a person intends to own a property. It actually functions as a cost-saving tool for people (i.e. investors) who intend to “flip” a home or for those who are subject to frequent relocation or who just find themselves not wishing to remain in a specific home for more than two years.
Title Binder vs. Title Insurance
Title insurance protects a property buyer and lender against unknown defects in the title. For a one-time premium, the title insurance company, which is in the business of examining public records, preparing title abstracts and selling title insurance, issues the title insurance after doing a title search on the property.
By purchasing a title binder, a buyer can save hundreds of dollars in title fees because it allows a short-term owner of real property to resell the same property and have a policy of title issued to their buyer at fraction of the cost.
Limitations of Title Binders
Title binders were designed for a special purpose and aren't available for all real estate transactions. The standard term is two years. However, some title companies do offer an extension for another year at an additional cost of another 10% of the Owners Policy Cost.
It is very important to note, the same title company that issued the title binder must be used when the property is sold. Sometimes, the listing agent for the former buyer (now the seller) is not aware of the title binder purchased at the time the property was purchased.
Title Binder Example
As an example of a title binder at work, if an investor purchases a “fixer-upper” and purchases a title binder, knowing they plan on fixing up the property and selling it within a year when they go to sell the property, they will use the same title company—which will be obligated to issue a title insurance policy for the new buyer—they originally used and avoid having to incur the costs of having the title searched again for the new buyer.