Question: Will new FHA owner occupancy ratios change the way condo associations view rental caps?

Owner Occupancy Ratio Requirement Likely to Decrease from 50% to 35%

Last month I wrote about rental caps in condo buildings, noting that oftentimes condo boards decide to implement a rental cap in order to meet the FHA loan requirement that the percentage of owners living in the building vs renting their unit must be 51% or more.

This month we got news that this burdensome ratio is likely to be reduced to 35%, making affordable condo ownership more accessible for buyers and giving owners more control over their investments. In a 427-0 vote, the House passed the Housing Opportunity Through Modernization Act to reduce FHA restrictions, which includes a clause to reduce the owner occupancy ratio from 51% to 35%. Although the bill still has to pass the Senate and be signed by the President, the landslide vote bodes well for this change.

Condo Boards Should Reconsider How They Determine Rental Cap Rates

Most people agree that quality of life and building conditions deteriorate as the percentage of renters increase and many condo boards will choose to maintain current cap rates for this reason. However, cap rates are often set around 45-50%, using FHA requirements as a guideline.

If the bill passes and 35% becomes the new FHA requirement, condo boards should reconsider the reasons behind their rental cap rates. Without data available that shows when rental caps have a positive effect, it’s guesswork. What if the biggest dip in quality of life/building condition occurs when 30% of the building is rented and there’s not much change after that? In that case, Boards using a standard 45-50% cap rate are restricting owners without the well-intentioned benefits. What if the decrease in quality of life/building condition is linear? In that case, one could make the same argument for a 1% rental cap as a 70% rental cap.

My point isn’t that rental caps are a bad idea (in theory) or that Boards are complicit in implementing them, but that the FHA owner occupancy ratio is really the only empirical reference point being used. If the bill does pass and the ratio decreases to 35%, Boards should strongly consider adjusting their caps accordingly.

On a related note, if your condo is not approved for FHA loans (check here), many property management companies charge $500 to $1,000 to file and process an application, but some local lenders offer it as a free service. I know that Jake Ryon of First Home Mortgage (jryon@gofirsthome.com) offers it. There’s little required by the Board and it can be completed in just a couple of months.

Question: I believe the value of my home has increased substantially. Can I leverage this to remove the (Private) Mortgage Insurance from my mortgage?

Before responding, let me catch everybody up on some basics:

  • Jake Ryon of First Home Mortgage explains (P)MI simply as “an additional payment a borrower has to pay to offset risk to the lender when the down payment doesn’t equal 20% or more of the sales price or appraisal value, whichever is lower”
  • It’s included when the Loan-to-Value (LTV) is above 80%. LTV is the amount of your loan divided by its value. In other words, the value minus your down payment (80% LTV = 20% down payment). This is the basis for today’s question – if the value of a home increase, the LTV decreases (more owner equity), and may allow a borrower to remove (P)MI.
  • The monthly cost is based on factors that include LTV, credit score, and loan size. Generally monthly payments range from about .25%-2% of your loan balance, divided by twelve
  • Conventional loans = Private Mortgage Insurance (PMI); FHA loans = Mortgage Insurance (MI)

If you have PMI on a conventional loan…

Per Jake Ryon of First Home Mortgage, you can request that it be removed when the LTV hits 80% based on payments against the original value or the value of the home has increased enough to bring the LTV to 80% or less. For example, if the original value of your home was $500,000 and you currently have $450,000 left on the loan, a new appraised value of $562,500 would result in a new LTV of 80% and your loan servicer may agree to remove PMI. Some key points:

  • You cannot have a late payment within the last two years
  • The request must be made in writing to your servicer (who you make payments to)
  • If you’re making the case based on increased value, you’ll need the loan servicer to order a new appraisal, at your expense
  • It’s ultimately the loan servicer’s choice whether or not to remove the PMI

It will be automatically removed when:

  1. You reach 78% LTV on the original value of your home
  2. You reach the midway point of your loan and have not reached 78% LTV (e.g. 15 year mark on a 30 year loan)

If you have MI on an FHA loan…

If your FHA loan was created after June 3, 2013 and your original LTV was 90% or higher, your mortgage insurance cannot be removed at any point during the life of the loan and the only way to remove these payments is to refinance into a new loan once you can attain an LTV of 80% or less. If your mortgage was created before this date, your MI will be automatically removed at 78% LTV.

If you’d like a question answered in my weekly column, please send an email toEli@RealtyDCMetro.com.