I see so many articles about the protective benefits of doing this, but my lender (and other lenders I've asked) say that residential mortgages cannot be held under LLCs (only commercial mortgages can), and that doing so can cause your entire loan to be called at once under penalty of foreclosure. 

Focus on one strategy and perfect it.Don't spread yourself too thin.As Buffet said - "Diversification is protection against ignorance"

.- Consider reimbursing the new owner: While not ideal, paying the $6k might be the most cost-effective solution to protect the contractor's license and your reputation.- Learn for future projects: This experience underscores the importance of thorough inspections, even on recently installed systems.- Check statute of limitations: Depending on your state, there might be a time limit on claims related to construction defects.As a hard money lender specializing in fix and flip deals, I've seen similar situations arise.

Sounds like this seller wants someone who will get to know him, HELP him, PROTECT him from aggressive buyers/investors. 

Contact the Federal Trade Commission and the Consumer Financial Protection Bureau. 

Since the remaining tenants have still been paying, I'm not sure that I can treat the MIA tenant as absent.Let's say the remaining tenants decide to move out (probably because they will eventually have trouble paying) and I make the refund check payable to all the tenants per the rental agreement (and to protect myself against claims from the MIA tenant), but they can't cash it because they can't reach this third roommate.Any recommendations on what to do with the money or what course of action to take?

@Sandeep JainHi Sandeep,I would consult an asset protection attorney.

Not making these repairs is not an option, you can't just not fix things or you lose tenants and suffer vacancy loss, potentially have legal problems, and just end up with more differed maintenance/ bigger issues over time if you don't stay on top of repairs. 

Deal structure is very important so that you have enough equity protection to secure your principal loan amount.

This isn't like a court battle where everybody has their back up against the wall ... trustee and lender may be willing to work with you.As the property owner you have the right to protect your interest by reinstating the existing loan, that's not to say the lender, after reinstatement, can't start a new foreclosure based on a violation of the due-on-sale clause, but may not.