Since we are also occupying the space how does it work when it comes to mortgage, mortgage interest etc?

Maybe a finance-related position with a company in the real estate space like a construction company or a bank / mortgage company. 

I thought about renting but would barely make the mortgage, which doesn't seem smart to me.

We've done previous deals with only one investor, so we only had one mortgage and note to secure their interest in the asset.

as low as 5% down on 2-4 unit, lower mortgage insurance premium and no upfront insurance payment at closing, and it's a conventional loan so stronger offer and less red tape than the FHA. 

You can rent rooms in a single family home, has nothing to do with your mortgage. 

The lease agreement would not reference the estate planning docs at all to avoid any reclassification as a purchase.Option 2 - purchase, he holds mortgage.Is it possible/legal to have a mortgage where 100% or nearly 100% of payments go to principal?

Imagine your rent or mortgage doubling?

I have been working with mortgage brokers and I am not satisfied.   

Do a 30-year Loan so you'll have less Mortgage expense and better cash flow.