If there were payment issues with the original subs, this becomes even trickier and could result in clouded title with mechanics liens.

The tenant has the utilities in their name and the gas was recently shut off for non payment since September.

I currently owe $197k (I used and FHA owner occupied for a small down payment), and I think that I could sell it for at least $275k.

They are asking for 20% down and a 3 year balloon payment.

But, there are custodians out there that process expense payment requests within a day, which make it really easy to get around this IRA rule.

Helen,There are more than a few loan programs that offer a low down payment and fairly easy to qualify for a new primary home.FHA 3.5% Down,  Fannie Mae 5% Down, Fannie/Freddie 3% First time home buyers programs.Credit scores under (695) I would suggest FHA due to flexible fico requirements. 

Given the new low down payment for Multis starting at 5%, you might be able to get one.

Maybe try and find some comparable houses that are renting and what they are renting for to give you a rough idea.There's not a lot of multifamily units available in your area, or mine, that will cash flow out of the gate given the current rates without a substantial down payment.

With such a high DSCR what kind of interest rate and/or down payment should I expect?

Secondarily, even if you feel you have a viable claim it's important to understand who will be responsible for payment in the event you succeed.