The rental is our old primary with FHA MIP still on it, though we're about $3,346.07 away from paying down to 78% of the original purchase price when my loan servicing company will have to legally remove $123/mo MIP payment. 

We feel confident that once we apply our own screening criteria, we could find decent section 8 tenants, however, I am questioning, as a safe guard, if it's legal to give a tenant a notice of terminating a lease if the tenant has caused enough damage or incurred enough fees to deplete their security deposit.For a prior experience example, our last Section 8 tenant (the "final straw" tenant) had a $650 security deposit and at one point, had the front door kicked in, breaking  the door, both locks, and breaking the surrounding plaster (not due to a home invasion).

You would also eliminate the design constraints of working with the existing structure.

It seems smart, but is it legal?

I am an environmental engineer who designs water and wastewater systems..

I would get a lawyer to find out the legal way.

It seems somehow or other they were affiliated with HSBC but I tried to call them and they weren't helpful.2) Is there any legal process, in the situation where a lien holder cannot be contacted or located, where you can give ample and public notice for lien holder to come forward and claim possession, otherwise lien will be forgiven?

I'd love to develop a clean, open, legal, and comfortable win-win situation for these sellers. 

Friends have suggested that we meet with a real estate attorney in order to ensure that we have everything lined up legally prior to beginning the endeavor.Our real estate agent gave us the name of a seasoned real estate attorney in South County and we are meeting with him next week.

Once again, I think you need to double check the value of time here... 1hr of a walk through vs countless hours of legal action.