Due to the unique layout of the home, and the fact that it has two principal doors on either side, I decided to convert the garage and wall off part of the family room in order to create an "in-law" suite with full/partial amenities (kitchenette, bathroom, etc) that could be rented out.My grandmother has given her blessing for the project and I'm hoping to pocket some rental income from this, but the obvious question remains: once I do the ReFi and mortgage the home, I would be taking monthly losses as my rental income wouldn't be enough to cover the mortgage.

Looked into selling the condo and I could get 160-170k with 135k remaining on mortgage.

Meaning, you are getting an option payment that is nonrefundable, what if they don't buy but want to remain a tenant. 

You can buy a $45k -$60k home in a decent area on a conventional loan, use your remaining cash to do a light rehab, and do well with it.

For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.

But it remains an old house (like many around it in Memphis).

You remain in control of the underlying assets and will pay interest(often high) back to the brokerage. 

My dilemma still remains knowing whether or not I can get HM and at an acceptable rate when I actually want to make an offer -- especially in a time crunch when there are multiple offers on the table for a property that was just made available.

If it is an area where you can get better quality then pass, remain patient, and try and find someone without so many red flags. 

I am able to cover our living expenses through my day job, so if we are able to pay off her remaining bills from when she lived in Sacramento, I think we will be able to have her do this full time.