Is this a bad neighborhood to invest in, or is there another rule out there for these types of areas? 

It's in a really bad condition.

I have no idea if you can get approved or not, but all the reasons you've been given so far are a combination of BS, overlays, or just bad info.

@Brad Mylius Hondros has a weekend only course...kind of exhausting sacrificing your weekends, but it's not a bad option...that's the way I did it...seemed to work well. 

They do they're best not to loan money on bad deals, and this being your first, it may be advantageous for you to have another set of eyes on the deal.

That said, there are many poorly run communities that contribute to ongoing depreciation as do smaller sizes and original poor quality of the home.

Your Contractor should carry both General Liability Insurance to protect your property against damages, and Worker's Compensation insurance to protect you in the event that a worker is badly injured on your jobsite.Before you start construction ask your Contractor to provide a valid, up-to-date Certificate of Insurance that indicates the coverage that they are carrying for their business.

A letter must be sent to the tenant stating the Owner's intent to nullify the agreement due to the tenant's breach of contract (not making payments on time)...and hope that the tenants don't have access to even a bad lawyer who would argue "owners said it was OK...

He explained that their bank client doesn't want it due to fair housing.I'm assuming it's part of fair housing where you can't call out a neighborhood as being "nice" or "bad" or "crappy" or "full of crime."

It's not an excuse to do a bad deal and with no money down, it may not cash flow, but you'll learn a ton and have your housing paid for by your residents while you're going to school.