My inclination is to refund her within 30 days after the moveout date but she is citing that that is illegal in TX as prepaid rent can't be used as a security deposit.

Don't forget to consider the Prepaids for your taxes and insurances as well. 

He has been late on rent one time which we worked through.When he received his income tax refund he wanted to be extra responsible so he pre-paid rent until October.  

You need to master real estate before lending in real estate, sounds like you may not be there yet.The website you mentioned is following the law, private or individual lenders may not charge pre-paid interest (points) or loan fees, you would need to be a registered lender in your state, in the business of lending, I doubt you want to go there.Best is to find a mortgage broker or established lender and work with them.

If the house sells and you still have prepaid rent then that would be transferred to the new owner to decide.

Then you'll have title fees which will depend on the title company, I'd say $900-$1500 and prepaids which will depend on the property.

http://www.insurent.com/slpb_ll.shtmlquote from their website:" For landlords, the Insurent® Program is a unique no-cost method to increase occupancies, eliminate rent loss, and streamline the rental process for all parties where the prospective renter does not meet your minimum financial requirements, and needs to put up additional security, prepaid rent, or have a qualified co-signer at 75x-100x the monthly rent.The landlord accepts the Insurent® Program; the renter pays for the Insurent® Lease Guaranty.

I've been researching, VOIP's 8x8, xlite softphone, skype, prepaid phone cards, etc...

Even subtracting $5k for various costs and prepaid, you still have a loan balance of $428k.  

The seller credit reduces the out of pocket amount by paying the closing costs.Conventional - investment property = 2% maxConventional - primary residence - over 90% LTV = 3% maxConventional - primary residence - 75.01% - 90% LTV = 6% maxConventional - primary residence - 75% LTV or less = 9% maxFHA = 6% maxThese credits are also capped at the actual amount of closing costs and prepaids.