Yes, it can be true. Sometimes it is difficult to get a loan in a Trust or in a limited liability company (LLC). Often, investment buyers are advised to purchase the property individually and then transfer the property to an LLC by using a quit claim deed. There are several reasons why this may not be a good idea, including the fact that you may lose your title insurance coverage.
This can cause significant problems for individuals who transfer their ownership interest into a trust or business entity, even when they do it simply for estate planning purposes. Oftentimes, the owner of the property is not actually selling or transferring the property to a different person, but rather to an entity that is controlled by them.
Under the 1992 ALTA Owner’s Policy, an insurer will likely deny coverage for a claim made after a voluntary conveyance via a quitclaim deed by the insured to an LLC or Trust. The rationale behind this is the insured did not retain an interest in the property. To address this problem, the 2006 ALTA Owner’s Policy expanded the definition of an “Insured” to provide coverage under the Policy to an insured that transfers title in the following instances: (1) to a trust in which the owner is a trustee; (2) to a LLC where the grantee is the sole member of the LLC; or (3) or to a Partnership, where the insured is a partner. This language provides superior coverage over the 1992 ALTA Owner’s Policy; however there are still common transfers that will be denied coverage.
Before transferring your property, for any reason, consult a real estate attorney. In this situation, a real estate attorney may recommend obtaining an “additional insured endorsement” prior to a transfer to avoid losing coverage. Only a real estate attorney can properly advise you on any pitfalls that may arise by virtue of a transfer of your real property.