If you can manage your equity ratio, your DTI will never be the bottle neck.

If you're testing the waters - experimenting to see if this is right for you, then do that. 

The Standford test link.

Now seems like the right time to test the market and make lower offers. 

I have been working through the different options with my own primary residence and I agree that it may not cash flow the way it would had you purchased it with the intent to rent in mind, you can test out renting it and if its not cashflowing you could sell it.

Extra monthly payments is great passive income and the down you can get goes to your cash buyer fund.Not that this is what you should be doing without appropriate background knowledge and experience, but it's an example of how barriers in real estate are really just tests of persistence.Reframe your mindset from, "I can't afford to buy an auction property cash" to "How can I buy this property without cash?"

From my conversations with a lender, it seems like I am in the clear after the 3 year period for payback of the DPA grant, and MCC is not tested again after closing, so as long as I live in the property I can keep using the 2,000 tax credit.

In the Chicago area, using the 2% test would truly lead me to analyzing no deals as the price/rent ratio here is quite high.

Stress test it for the lender.

A consult your advisors clause in an offer letter might help you avoid legal repercussions but the decision to move forward with a deal or not should face a more stringent test than, "Will I get sued and/or prosecuted".I don't think you should automatically proceed because someone appears to have their wits about them.