I would suggest to check with your local laws first.Most likely you will need permit ( I guess you can get away without, obviously not suggesting that :D)) but possible) , also check your zoning.If not possible to create separate unit legally, I suggest not putting an oven in the basement, and rent it without, or live in it yourself

As long as you can meet the guidelines to get 75%CLTV and have enough equity then you can proceed.

Specifically, we'd like to understand:Liability Protection: How does each state's legal framework and case law compare in protecting our personal assets from liabilities related to the property?

I am paying for all treatments, but they are asking for rent reductions etc. after legal advice from a connection they have that has been giving them legal advice. 

It's also good for insurance and legal reasons, because you will need to indicate every adult and all persons, as well as details (like children, pets, etc.), on the lease.  

@Jerry ZhangYou cannotYou can give a personal guarantee but then you would have to have other assets.What could happen and we have seen many times is they go into default and the 20% equity cushion goes out the window due to late fees, accrued interest and legal costs.

Construction skills, loan skills, financing skills, legal understanding, real estate transaction skills, etc all greatly help.Personally I wouldn't deal with someone that has no money, lacks experience, or some kind of resources. 

They'll have to find a home they can afford, and then one that meets the guidelines (needs to be in good condition.) 

Most of my customers who own their own land typically use Fannie Mae since it offers a ower Dp for 2-4 units and the guide lines are more lienant. 

Maybe this would also make it worthwhile to jump through the city hoops to make the basement a legal unit.Then you could maybe put a LTR in the basement who could assist with the STR in the main area.