Seller financed (probably) won't be reported to the credit bureaus and so won't impact your credit score at all.

Using mortgage debt at 6-7% on a refinance to pay off higher rate debt such as a credit card at 15-25% is a savings!

At the end of the day; you need more money to do something like this.MAX LTV on new builds is 80% LTC, Meaning if the build is $550,000 and Land is XAdd ($550,000 + x ) * .8 = LOAN AMOUNTYou would need to come in with MINIMUM 20% of the cost in addition to closing costs and reserves, $80,000 is not going to cut it for this project.

If you own a 2-flat with an additional non-conforming garden unit (basement) being rented, and you're considering a cash-out refinance, how will the lender evaluate the rental income?

With substantial equity in your Fort Worth rental, a cash-out refinance could free up funds to purchase additional properties.

This will allow you to remove the person and do the financing on your own.Home Equity Loan/Line of Credit: Since you're looking to access equity, a home equity loan or line of credit (HELOC) can be a good option.

Keep your payment at no more than 35% of your income and minimize your credit card and auto debt.  

Over $100k it is very easy (depending on credit scores) to get under 7%. 

Additionally, his credit is not the best, and he has limited funds for a down payment.Any potential options or solutions that may be available?

Additionally you can do a cost segregation study and get a lot of depreciation benefits to offset the rental income (and potentially other income).