Your lender setup their loan application incorrectly as a purchase if it was a refinance the costs wouldn't be 132k which is assuming a purchase price of 120k plus a payoff and closing costs which is how the cost total arrived at 132k.The cost should instead say about 13k and new loan to be 84k for a net of 71k proceeds to borrower approximately. 

I want to continue to do this with other borrowers so I can pay off my mortgages.

We need to borrow about 130k for the remodel and will refinance in 6 months to 2 years to repay the funds borrowed.  

A due on sale clause basically says that if the borrower transfers title to the property, then the note holder has the option to call the entire loan due.

The best possible scenario is to assume the mortgage of the previous borrower with zero money down.

If you don't have enough cash for the rehab yourself, you might borrow it from a private lender or a HELOC if you can.You may not be able to turn it into a highly profitable deal, but you might make a little bit and gain valuable experience both on the rehab and the deal structuring.

According to HUD 4155.1, more specifically 4155.1 4.B.2.b,"At least one borrower must occupy the property and sign the securityinstrument and the mortgage note in order for the property to be consideredowner-occupied".Regarding potential homes being fully occupied, during the sales process you'd inform the seller of which unit you want to be vacated in order to fulfill the owner occupied requirement.

From HUD themselves... 4155.1 4.B.2.bFHARequirementfor EstablishingOwnerOccupancyAt least one borrower must occupy the property and sign the securityinstrument and the mortgage note in order for the property to be consideredowner-occupied.FHA security instruments require a borrower to establish bona fide occupancyin a home as the borrower’s principal residence within 60 days of signing thesecurity instrument, with continued occupancy for at least one year.The entire text of the HUD requirements can be found here...http://portal.hud.gov/hudportal/documents/huddoc?

I suggest getting an authorization to release and a specific limited power of attorney from the seller/borrower.  

Dodd-Frank was designed to protect individual borrowers - homeowners - from predatory lending practices.