In answer to your question "how do you handle selling/transferring homes to tenants if not with a rent credit model?"
My partner got a Mortgage Loan Originator license and we offer mortgages through a related company with proper paperwork/documentation/etc.
For the record, we have never had a tenant "work the system" to keep the home tied up when we repossess after eviction, although this is a remote possibility. In Texas (where we lend) title to a manufactured home can be reclaimed by the lienholder upon submission of a notarized form attesting to the breach in the finance contract. (When the home is personal property). In other words, if we say they are in default, we can get the home back and the tenant has no recourse except to sue us, which has not happened.
Of course we would not do that without a good reason (failure to pay) and if they are failing to pay the home contract they are typically failing to pay the rent due on the lot lease as well. Failure to pay your lot rent is grounds for eviction. So we go to the local Justice of the Peace (JP) who is NOT a district court judge and say, "give us a writ of eviction" and that is always granted because in Texas there is no defense to non-payment.
I have said many times, start with the end in mind. Eventually you may stand before the judge and have to explain what you did and why it was proper.
EVERY JURISDICTION IS DIFFERENT.
In your case, your local (small claims) court judge apparently has the authority to grant you an eviction, but he does not have the authority to grant you a foreclosure (which is a different legal proceeding). And he has decided that foreclosure is the "proper" legal remedy for you to recover possession of the home under the contract you made.
So you will have to go defend your contractual rights in the "regular" court to get this tenant out of your hair. In some jurisdictions, foreclosure has special protections for the resident and you may have to follow these to the letter. Or not, depending on the judge.
The tenant may have legal assistance to drag it out every step of the way, but eventually it will come down to standing before the judge and (1) following whatever rules you have to follow and (2) not being the "bad guy." The tenant is the "bad guy" because he isn't paying. The judge will side with you if that's the only factor in the case.
What you want to avoid is the claim "I'm not paying because blah blah blah" and have the judge be sympathetic to that and not to you. (Tenant says "I was taken advantage of!" Judge says, "How?" -- the sympathetic answer is "I was building up all this credit (or in our case, equity) and now it's being seized without "due process."
Example -- tenant gets $20,000 mortgage and over time there is $1,000 left to pay and the tenant thinks they are "owed" $1000 so they refuse to pay the last $1,000. (Imagine they say they had a $1k A/C repair and blame us). We do the procedure above and we get the home. But the tenant has been "screwed" out of $19,000 worth of home they did pay for.
In a "true" foreclosure, we would have to auction off the home (say it sells for $5,000 because it's used and wholesale).
And then we get to keep our $1,000 (owed) and legal fees (say $1,000) but the evicted tenant is owed the remaining $3,000 that the home was worth over and above what was still owed. This is the "equity" that the court could be sympathetic for the tenant.
No judge is going to be sympathetic to a tenant who doesn't pay their "rent" but expects to receive the benefit (housing).
On the flip side, if the case was something like "Oh you (tenant) have $19,000 worth of rent credits but we're evicting you because you didn't mow your lawn often enough and those credits are now worthless even though we "promised" you could use them to buy the home you're living in," the judge is going to look at that very differently.
So you have to go in front of the "real" judge (not the small claims judge) and explain all this.