finally found a home!!!
You would be eligible for an FHA loan. For details:cbarcus@cbcnationalbank.com

I have a 15 yr fixed rate mortage with 8 yrs left. I owe $120K. I can refinance to a no cost 7/1 ARM at 2.75%. If I continue to pay my mortgage at my current rate today of $1606 (P&I), I should be able to pay off my mortgage in 7 yrs, cutting of one entire year from my current 15 yr fixed rate. Make sense?
Be very skeptical of "no cost" loans. Also,with a 7/1 ARM its amortized on a 30 year schedule. So you wouldn't actually be cutting 1 year off. If you would like me to explain further feel free to email me at cbarcus@gmx.com or cal me at 412-328-3241.

Mortgage
Absolutly not, as long as you are going to live in the house. If its an investment property then there is a huge difference.

True that seller-funded closing costs limited to 3% if downpayment less than 10%
That is true. However as sbeaver mentioned you can always go the FHA route. That would allow you to get the full $10,000. Ask your broker about FHA loans. If they do not offer FHA, I would be glad to help: cbarcus@gmx.com or 412-328-3241. We are a Federally Chartered Bank that lends in all 50 states.

Resold mortgages
Most mortgages are sold. However, some lender have whats called Portfolio Products that stay with the Lender and are not sold, ever. We have Portfolio loans and the rates are the same as any other loan. In cases with really good credit the rate is actually better. If you would like to contact me to discuss...

Are subordination agreements required on second lien mortgages when refinancing the first lien only?
The other are correct, it is needed. Best thing to do is either close out the 2nd Mtg(If there is no balance), or pay it off in the new loan and just get another 2nd Mtg or Line of Credit. Its easier and faster that way. But if you really want to keep the 2nd it can be done. Any further questions on this call or email...

Are there any downsides to a FHA Steamline mortgage loan?
Sounds very suspect to me. As some of the others mentioned the monthly mortgage insurance has just gone up. I am a local PA lender and I would be glad to take a look at everything for you. 866-823-4330