Is it common to purchase a home with other debt?

If the answer is yes, then it's a no brainer to make minimum payments on your 2.8% interest rate mortgage, and use the funds that you would have paid extra to pay it down faster, to either invest in more real estate, the market, or anywhere else where you can get a ROI > 2.8%.If the answer is no, then feel free to aggressively pay it down as fast as possible, to become debt-free faster, and just have a large amount of money in savings or to splurge with.The bottom line is that your 2.8% mortgage is GOOD debt.

If I create a debt fund that offers 9% interest on first lien notes with a 5-7 year payout, would that be attractive to high net worth investors?

Learn to control your spending and pay off debt.

I mean myself and any bank would need more details, but if you utilize that large sum as a downpayment and have a small mortgage, wouldn't you easily qualify for the debt to income?

I would apply the cash flow to pay down the debt and hope to have significant passive income (or equity to put into something else) in 10 years.

Eliminate debt, establish a budget, and save.

Her mother is willing to (co-sign) and has excellent credit and debt to income ratio that will more than allow but I’m not sure the best way to structure this for the house to still be in our name?  

It may or may not show on a credit report, depends on the servicing and you should have the loan serviced.Failure to include the debt on a future loan application is mortgage fraud, wanna go to jail?

Eliminate debt, establish a budget, and save.