An interest only loan is often associated with bridge financing/hard money loans.

It was a FHA/HUD assumption so it takes longer to close than straight to agency or doing a bridge -> HUD and again, the onsite team checked out.

Bridge products that I am familiar with are for non owner occupied properties.  

It is a bridge that I will lease to you for 5 years, $1000 a month.

Your downpayment would be 25-30%, but if the property is being delivered vacant and needs some renovation, then a bridge these are 70-75% LTC with a 12-24 month I/O term. 

One thing to consider is that the seller is also trying to squeeze his best interests in the deal and the commission arrangement is between listing agent and seller so when they see dual representation or Unrepresented they initially are thinking discount too if the agent hasn't crossed this bridge already upon getting the listing. 

If you are dead set on doing a conventional loan, you could also look into a stabilized bridge loan with your, or a different hard money lender.

@Jeff Bridges that is fantastic advice.  

We would give a bridge loan for 75% of the value so 75k with our own money so we make our own rules and do not have any seasoning requirements for value.

They usually stick to just B neighborhoods- especially Bridge from KC- so stalk them and just buy next to where they do :)  Hope this helps?