FHA or 5% down conventional can you use a co-signer?

My daughter in law is self employed having a daycare in her home. After write offs of rent, utilities and food the banks are saying she does not qualify. Income looks bad. However she easily qualifies before deductions. Her and my sons credit score is over 700, they've save enough for a maximum of 5% down on 186,000 home, they have been paying in rent for 3 years the same amount they would pay if they could purchase the house. There seems to be no one willing to work with them, even though they would have the same rent and utilities as they have now, even if she was not doing daycare. Her mother is considering co-signing, but one bank told me to do an FHA loan with a co-signer they would have to put 25% down. This is heart breaking, as they've worked hard to get to where they are at to buy a house, and then being told no because she is lucky enough to basically write off all her bills which allows her more money than most people making same. Any help or suggestions would be appreciated.