Which if you read the fine print, is going to get ALOT of people in trouble.

Is this just a slap on the wrist, or bigger fine/punishment? 

It would be fine, until the neighbors sue you.

He still signed and they asked the standard "did anything in your employment status change" and he answered no since the refi will save him $300/month and has plenty in reserves and no issue paying it.I told him once he's cleared to close from underwriting he'd be fine, but I'm also not an expert on this specific situation and he is concerned there may be repercussions about lying. 

Many banks will strongly prefer a shorter amortization (usually 20-25 years), but there are banks in most markets that are fine with a 30-year.

Okay, fine. 

I understand and that's fine, if I take away owner finance, would you come down $50,000?"

Lender suggested it and was fine with it.However, my current agent says no multi units will pass FHA inspection.

If you are ok with the principal paydown being considered your investment, then fine. 

As long as you can qualify for the purchase on your own you will be fine.