If you were my client up here in CT I would advise you to deny this applicant and be patient.  

He denied doing anything illegal.

Im sure someone who works in lending can confirm or deny that point....but either way, be honest!

Its best to be forthcoming with them now rather than post appraisal and then get denied after paying for appraisal fees etc.http://www.fha.com/fha_article.cfm?

This Morning I was informed by @Jesse Hinaman that I am able to remove my MIP; however I have tried in the past and I was denied due to LTV ratio.

Or would they just deny financing outright until the 12 months is up?

I recently got denied a refinance loan on my property due to losing my job whilst this was in the process.

If I rent a two family property that I own and have homeowner insurance on it currently, would it cover if I decide to rent both units or would I have to report that and get a new policy in order for a future claim not to be denied?

Given there isnt a one size fits all I'm looking for personal recommendations considering policy coverage, claims denied, total cost per year etc.

There is a highly likelihood your claim could be denied, if the property is not properly insured (leaving you with the financial responsibility and at risk for a possible lawsuit).