The house I would be renting has a current mortgage (including escrow) of $1,100 per month.

@Greg Scott thanks for the mention:)@Usman Khan welcome to the "fun" of S8, where you can rarely get ahold of anyone at a Housing Commission office:( THey are all overworked and underpaid.Reference this for your S8 training and maintenance:https://dhcmi.org/sites/default/files/upload/LandlordGuideBo...

Also, it is bananas that a house like that is one is only 849k.

Most old houses it is about 4 ft at the perimeter of the room, maybe less. 

House is worth 260k and we owe 200k on it.

I don't know, it sounds kind of weird but my friend is kind of freaking out about potential liability since the lien was literally placed on the house essentially hours before closing.This is being made all too complicated.  

If you decide to keep your house, you can do an IRRRL after you have made at least 7 payments on your new mortgage.

House hacking is an excellent strategy, especially with the potential to use an FHA loan to secure a property with a low down payment. 

From my experience working with over 400 investors, those who start with house hacking scale much faster.Good luck!

With your focus in using house hacking, Conventional or FHA loans would be your best options.