All required plans must be approved prior to funding, if applicable).

What would be the legal course of action?

I'm not familiar with the legality of your proposed idea.

I would evaluate the scores and see if there are simple ways to improve them before going through a ton of effort to try and find a loophole that would leave your partner with minimal legal recourse if things were to go south.

The rental is our old primary with FHA MIP still on it, though we're about $3,346.07 away from paying down to 78% of the original purchase price when my loan servicing company will have to legally remove $123/mo MIP payment. 

I am considering offering the seller a down payment plus payments for a defined period until the property is in a condition that the bank will approve the loan.

You can always work in the property wearing a proper asbestos-approved mask.

We feel confident that once we apply our own screening criteria, we could find decent section 8 tenants, however, I am questioning, as a safe guard, if it's legal to give a tenant a notice of terminating a lease if the tenant has caused enough damage or incurred enough fees to deplete their security deposit.For a prior experience example, our last Section 8 tenant (the "final straw" tenant) had a $650 security deposit and at one point, had the front door kicked in, breaking  the door, both locks, and breaking the surrounding plaster (not due to a home invasion).

The plan approvals are usually faster and cheaper.

It seems smart, but is it legal?