Title insurance protects property buyers and lenders from claims against the buyer's interest in the property. If a missing heir shows up after the sale and claims the property is his, if a recorded easement was missed in the property title search, or if someone forged the actual seller's signature on the deed, title insurance would protect the buyer and lender against loss in property value and would pay for legal defense. Who pays for title insurance varies from place to place. In Illinois, sellers usually pay for part of the cost and buyers pay the rest.
Title insurance policies come in two basic forms -- one for the buyer and one for the lender. The buyer's policy protects the buyer's interest and equity from claims against the title he takes with the sale. In Illinois, the seller usually pays for the buyer's policy. A buyer's policy is not required by law; rather, it is prudent for the buyer to obtain a policy to protect his interests. Because the seller is implying through the sale that the title to the property is "clean" -- unencumbered by issues or liens that would otherwise limit or reduce the buyer's interest -- it makes sense the seller would pay for this policy.
The lender's policy protects the lender's interest in the property, up to the loan amount. While the lender's policy is also not required by law, most lenders require a policy as a condition for the loan. In Illinois, the buyer usually pays for the lender's policy. This makes sense because it is the buyer who wants the loan and the lender's policy is a condition of getting the loan.
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While Illinois custom provides for the buyer to pay for the lender's policy and the seller to pay for the buyer's policy, these and most other closing costs are open to negotiation through the purchase contract. The buyer can condition his offer on the seller paying for both or neither policy; the seller can reject, agree to or make a counter offer to the terms.
When a property owner refinances a mortgage, he does not need a new title insurance policy because owners' policies remain in force as long as an owner retains title. However, a lender's policy covers only the loan issued at the time the policy is taken out. If the owner takes out a new loan, the lender -- even if it is the same lender that issued the initial mortgage -- will require a new title policy. Unless the lender offers to obtain its own policy, the buyer must pay for another policy. Some title companies offer discounts for new lender's policies if they are taken out within a limited time from the initial policy.