What is an Insurance Binder for Mortgage? A 2024 guide
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Discover the methodologyDid you know that when you apply for a mortgage, you might need an insurance binder? And, no, this isn’t a little folder with all your insurance policies inside.
Then what is an insurance binder for mortgage purposes and why does a mortgage lender need to see one?
This article covers everything you need to know about mortgage insurance binders including what it contains and who needs it.
Insurance Binder Mortgage: 4 Key Takeaways
- Includes all the information about an insured property to prove that insurance is in place
- Requested by the mortgage lender before closing on your new home
- Lenders nearly always request insurance binders and sometimes landlords request them too
- An insurance binder is not a substitute for a certificate of insurance
What is an insurance binder?
An insurance binder for mortgage purposes is a short, legal document confirming a property's insurance coverage while the full policy documents are being processed.
This document is necessary because it can take an insurance provider up to a month to issue the full insurance documentation, whereas the mortgage lender will normally require proof of insurance within days of closing on a property.
The insurance binder can also be provided by an insurer before an application is accepted, as a commitment to insure a property at a future date. In such instances, the insurance binder for the mortgage will serve as an agreement between the insured and the insurer for coverage to come into effect at a later date.
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Do I need an insurance binder for my mortgage?
Yes. If you are a soon-to-be homeowner in Canada, buying a property with the help of a mortgage lender, you will likely need an insurance binder. Mortgage lenders in Canada tend to ask for the insurance binder before they agree to provide you with your loan and having an insurance binder is normally a requirement listed in the mortgage agreement.
The purpose of the insurance binder for a mortgage is that it puts the lender at ease. Since the property that you are purchasing is done so with the loan of their money, they will want to know that the property and their investment are protected.
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What does an insurance binder letter include?
An insurance binder for mortgage purposes needs to provide information confirming the inception of a home insurance policy on the property being closed on. It, therefore, needs to contain a whole host of information that is commensurate with the mortgage loan agreement and can help the mortgage lender identify the property and the policyholder.
The information included in homeowner insurance binders includes.
- Information on the insurance company: This will include the name of the insurance company issuing the home insurance policy, including a policy (reference) number and company contact details
- The insured person(s): Full details of all the individuals listed on the home insurance policy itself, including names and dates of birth.
- Loss payee: The loss payee is the party of a contract to which an insurance benefit is paid. This can be the policyholder or a third-party who has an interest in the property itself, such as a mortgage lender.
- The policy inception date: The actual date from when the home insurance policy is in effect and the insured property is covered from loss.
- Identification of the property in question: This will be the complete details surrounding the actual insured property. From address to type of residence, including a description of the property itself.
- The type of insurance policy: There are numerous types of home insurance policies and this section of the insurance binder will confirm the exact type of cover on the insured property.
- Insured perils: The extent of the cover is usually determined by the type of the insurance policy, but the insured perils may contain additional coverage for specific perils that may have been included in the coverage by choice, or upon request from the mortgage lender.
- Amount of coverage: States the full amount in CAD that the property is insured for.
- Applicable co-payments and deductibles: This section will specify if any co-payments are expected to be paid in the event of a claim and/or if any deductibles are included in the home insurance policy.
Good to know
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Where do I get an insurance binder for my mortgage lender?
You request the insurance binder from your insurance provider after you have applied for your home insurance cover. Upon request, your insurer will issue the legal document stating all the necessities of the insurance coverage while your application goes through formal underwriting.
Once underwriting is completed, the insurance provider will provide you with the full policy documents in addition to some form of certificate of insurance that will replace the insurance binder. The insurance binder itself is, therefore, just a temporary document confirming proof of coverage.
Watch out!
The insurance binder for mortgage purposes is not a certificate of insurance, nor can it be used as a substitute for an insurance declaration page. It is simply a placeholder provided by your insurer, between the inception of your policy and the issuance of the full insurance documentation, with your insurance details and as an agreement of coverage.
Why does my mortgage company want an insurance binder?
Since the mortgage lender gives you money in the form of a mortgage loan to help you buy a property, they will want assurance that you will pay them back the money that you have borrowed. In the vast majority of cases, the property itself is used as collateral to guarantee the repayment of the loan and, if the borrower defaults, the mortgage lender can seize control of the property instead.
As the property is the collateral for the loan and the lender’s money-back guarantee, they want to make sure that the property is insured before finalizing the mortgage loan and closing on the property.
Because, if they guaranteed the loan and closed on the property without the property being insured, and in the slim chance that something bad were to happen, they would lose both the loan amount and the property it is linked to.
Expert advice
If you already bought insurance for the property and the mortgage loan falls through, don’t fret. All home insurance providers in Canada offer a free look period, which gives the policyholder time after the policy inception to cancel the insurance and receive a full refund.
How long is my mortgage insurance binder valid?
Insurance binders are only meant to be used as placeholders and, as such, they may only be valid for between 30-60 days. Any further length of validity would be redundant as the full policy insurance documentation will have been prepared and provided to the insured which supersede the insurance binder.
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