On October 31st Blue Metrix reached back out and said they weren't going to pay off the loan unless they got a greater discount.

Possibly break loan covenants and can't cure default, lender takes back property.  

There was also a loan grant available from the state of NH for first time home buyers for 3% down payment assistance.

But that extra $7200/year will go a long way in paying down your loan faster, build up another downpayment fund, pay off other debt, etc. 

You could use a HELOC, but with VA loans you have an allotment so you can get loans on more than one home depending on how much bandwidth they give you.

Assuming since you did any FHA loan, this was a househack?

Your answer needs to make sense, and be true.Also refi'ing your current primary into an investment loan also has the potential to be fraudulent if your family still occupies it as their primary. 

They will continue to get 360 month loans for the 'cash flow'.

Option 1: The loan that the owner has is an assumable loan at a 3.875% rate and still has about $265K.

If it is a good business with a hard to finance issue, he'll work with the loan team to figure out how to lend to them.