A more likely situation is you’d have to offer AT LEAST 7% to her, making your payment $1830 and your payoff in 3 years $265k.

I couldn’t do much about that situation until I left that job.

I'm worried that this equity we are sitting on is not being put to its best use, and am wondering what someone in this situation would do? 

Those were the situations where I was looking for ways to make it work.Don’t come out the gate haggling, or even discussing the terms at all.

I agree with many of @Alan Asriants' points, especially when considering OOS Sec. 8 investing.A lower price point or smaller investment doesn't always mean low risk.House-hacking locally could be a better transition depending on your goals and situation.

That said, here is my situation.

ParkerI find myself in very similar situation in Indiana.

What paperwork should I keep a paper trail of to make things like taxes and other situations better/easier for myself?

Is this a person who is, from here, going to turn their life around from the desperate situation that they find themselves in right now, such that they are willing to take a Subject-To deal? 

Not questioning your judgement/assessment, just trying to understand the situation to best advise you.