But to answer your question, no, the 203k Loan would be ONLY for the amount you need to buy and rehab it, less your (low) deposit.

Welcome to BP.And your initial deposit has been earning you ~$35k per year on average ever since - despite the diversion of a global financial crisis in the middle of that!

And either add on the energy you are currently paying for onto next month's rent or deduct from her security deposit.

When offering on a HUD home, what contingency in the contract would get the deposit back should the closing not happen?

I like the idea of an independent 3rd party doing this.Have you found that it helps with disputes on recouping security deposits in the case of their being damages?

If the offer gets accepted, I plan on visiting the house and asking the owner personally what the situation is before moving forward even with a deposit. 

The security deposit will be at issue if the co-tenant doesn't move, you may not be able to get it back. 

The problem I have with the partial rent is that he does a direct deposit. 

Good credit money for deposit and show 6 months of payments

Well he agreed to prepay 4 months and give one months security deposit, he also agreed to stay 4 months ahead of rent and I said that the eviction process will start the second he falls behind because NJ has a long tough eviction process.