When he missed his rent payment we gave him a notice to quit, he accused us of "entering his property without 24-hour notice", although I only knocked on his door and when he answered, handed him the notice. 

This wouldn't be mortgage fraud (because you are living in the property), and you are able to make some revenue from the tenants, or am I missing something here? 

They also noticed the furnace and hot water tank is missing / stolen. 

We are actually thinking about moving into the smaller unit. we are thinking if we should rent the main unit for long term rental or STR like airbnb but im afraid with airbnb, the non occupied days we may miss out on cash if its not rented out. 

Are there any other cons that I am missing for doing this?

That kind of restriction just doesn’t work for someone like me.I’m trying to figure out if I might be missing something in how I’m approaching this or if others have insights or examples of towns that not only allow STRs but also have laws that offer enough flexibility to operate in the way I’m aiming for.Many towns technically permit STRs but impose restrictive rules like membership requirements, ownership duration limits, or rental day caps, making operations challenging.

Will they institute the default rate over a technicality such as missing the completion date by a few months  or will they ignore the default rate because they see the reason for the delay wasn't entirely borrower's fault and borrower  has a plan of action to get the project on track?

Unfortunately I had a bad inspector who missed a lot which made it about a $60K renovation instead of what I planned for which was $15K.

The records of the closed title company MIGHT show how they handled the issue, but more likely they missed this issue otherwise as part of their solution a mortgage satisfaction document would have been recorded at that time. 4.

Your post is missing important pieces :)