Questions and Answers… Considering using Section 8….
Question 1
I am considering using Section 8, but wonder how rents are set.
Answer 1
Fair Market Rents (FMRs) determine the eligibility of rental housing units for the Section 8 Housing Assistance Payment (HAP). FMRs are gross rent estimates. They include the shelter rent plus the cost of all utilities, except telephones.
The U.S. Department of Housing and Urban Development (HUD) defines FMR areas as metropolitan areas and non-metropolitan counties. FMRs are intended to be housing market-wide rent estimates that provide housing opportunities throughout the geographic area in which rental units are in direct competition.
HUD sets FMRs to assure that a sufficient supply of rental housing is available to program participants. To accomplish this objective, FMRs must be both high enough to permit a selection of units and neighborhoods and low enough to serve
as many low-income families as possible. The level at which FMRs are set is expressed as a percentile point within the rent distribution of standard-quality rental housing units. The current definition used is the 40th percentile rent, the dollar amount below which 40 percent of the standard-quality rental housing units are rented. The 40th percentile rent is drawn from the distribution of rents of all units occupied by recent movers (renter households who moved to their present residence within the past 15 months).
HUD sets fair market rents annually for units with different numbers of bedrooms. In most areas, the fair market rent is set at an amount sufficient to pay rent and utility costs for 40 percent of the recently rented units in the area, excluding new units. In certain metropolitan areas, HUD sets the fair market rent at the 50th percentile instead.
Reasonable Rent is certified by the housing agency for each household that is subsidized. What this means is that the rent cannot be more for a subsidized unit than it would be for an unsubsidized unit, comparable in size, amenities and geographical location.
The rent a landlord charges must be reasonable under HUD standards. If rent is reasonable, the local housing agency calculates the gross rent for the unit which is the amount of rent requested by the landlord and the utilities the tenant must pay (utility allowance based on the size of unit and type of utilities unit used—natural gas, oil, electricity and water; then the gross rent (unit rent and utilities) is compared to the payment standards established by HUD (based on unit size). If the gross rent is less than the payment standard for the rental unit, then the rent is affordable and may be approved; if more, the family may be permitted to pay the excess amount as long as the amount does not exceed 40% of the family’s monthly adjusted income
If the local Public Housing Authority (PHA) determines that the rent charged by the landlord is not reasonable and the landlord refuses to lower the rent, then the agency will tell the family to search for another unit.
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Question 2
Should I be concerned about having earthquake insurance for my rental properties?
Answer 2
Unless the lender required earthquake insurance, each property owner must assess the risks of going without the coverage vs. the cost of the coverage. The risk of earthquake damage depends on the location of the property, the type of
property, date of construction, and the improvements made after construction specific to reduction of damages.
It should be obvious that earthquakes can have different magnitudes and occur at different distances from a property. In general, as either the magnitude goes up or the distance decreases, the severity of shaking increases. Those residences that are relatively close to an active fault are more likely to suffer damage, although there can be exceptions due to numerous reasons. Thus, even though the probability of a magnitude 6 earthquake someplace in a particular region is as
high as 8% per year, the probability of it being close enough to damage your property is smaller. NOTE: Earthquake magnitudes are rated on the Richter scale which is logarithmic rather than linear. Without getting into the actual math
of it, the energy released by a magnitude 7 quake is 10 times that of a magnitude 6 quake and 100 times that of a magnitude 5 quake.
For a well-built wood-frame house or other building, the deductible will generally exceed the structural loss for most moderate earthquakes. Due to good design, in recent earthquakes the damage to structures is a smaller part of the total loss than the damage to contents.
There are various possible improvements that will prevent or at least reduce impact of certain types of potential damages. Many improvements are relatively inexpensive compared to the protections afforded. For example, about $25 will greatly reduce the chance of an earthquake causing the hot water heater to tip over and both irreparably damaging the heater and damaging pipes, resulting in also extensive water damage.
Earthquake insurance is catastrophic insurance and therefore deductibles are relatively high. Deductibles are generally in the form of a percentage rather than a dollar amount. Deductibles can range anywhere from 2 percent to 25 percent of
the replacement value of the structure. Insurers in states like Washington, Nevada, and Utah, with higher than average risk of earthquakes, often set minimum deductibles at 10 percent or higher. With a 10 percent deductible, if it cost $1,000,000 to rebuild a property the owner would be responsible for the first $100,000 dollars. In most cases, owners can get even higher deductibles to save money on earthquake premiums.
This limit works much like the deductibles on your auto insurance. The result is that the insurance pays only for damages that exceed the deductible. However, unlike car insurance, some earthquake policies treat contents and structures separately. This means the deductible amount applies separately to the:
- Total amount of the loss for contents
- Total amount of the loss for the structure
- Total amount of the loss for unattached structures like garages, sheds, driveways or retaining walls
Not all policies are alike. You should compare the coverage differences between companies to get the coverage that best meets your needs.
Premiums vary widely by location, insurer, the type of structure that is covered, and, of course, the deductible amount. Generally, older buildings cost more to insure than new ones. Wood frame structures generally benefit from significantly lower rates than brick buildings because they tend to withstand quake stresses better. Regions are graded on a scale of 1 to 5 for likelihood of quakes, and this may be reflected in insurance rates offered in those areas.
Although an earthquake is the first thing that comes to mind when someone mentions earth movement, this very broad category also includes landslide, mudslide, mudflow, sinkhole, or any other movement that involves movement of earth. Loss caused by these hazards may be covered if the damage resulted from an earthquake. An earthquake endorsement generally excludes damages or losses from floods and tidal waves – even when caused or compounded by an earthquake.
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Question 3
I’m refinancing my rental property. Why do I need to pay for another lender title insurance policy when the same lender was provided a policy when I got the original loan?
Answer 3
The lender’s policy is sometimes referred to as the loan policy. A lender’s policy covers the cost of defending insured matters against attack. As to be expected, lender policies will except or exclude certain matters and are subject to various
conditions. In general, the lender’s policy follows assignment of the mortgage loan, meaning that the policy benefits the purchaser of the loan if it sold. This is of value to lenders and greatly facilitates the sale of mortgages into the secondary markets.
Lender’s title insurance, however, does not cover events beyond the time of escrow closing. Title insurance is required by a lender when you refinance your mortgage loan. When you refinance, you are obtaining a new loan either from your original lender, as in your case, or a new lender. Even though ownership of your property has not changed, and you remain protected by the owner policy from your original purchase date, the title policy purchased for your original loan does not insure the new mortgage created by the refinance. The new lender or the same lender requires title insurance to protect its investment in the property. The existing lender’s policy terminates when you pay off the mortgage.
Your owner’s policy remains in effect for as long you and your heirs (or certain “related” parties) retain an interest in the property. However when you refinance your mortgage, the conditions under which the lender’s policy was issued have changed. Protection against events that may have transpired between the times you purchased the property and the date it is refinanced is an issue that must be addressed by the new lender. The lender needs reassurance that the title to the property they are financing is clear or as otherwise agreed.
Examples of such events may be a second mortgage taken on the property that could jeopardize the priority of the new lender’s mortgage, legal judgments for unpaid taxes or child support, or mechanic’s liens filed against the property for contractor’s claims for work done and remaining unpaid by the owner.