I'd start by having someone come out and give a price on removing the mobile home and upgrading the utilities. That's likely to be costly, but you have to do it. Can you and she do any of this work yourselves? I personally wouldn't have the skills, but it'd be a huge money-saver, if you could.

At that point, you could investigate selling the lot "as is", though an empty lot isn't the easiest thing to sell. Does the neighborhood have other empthy lots? Is this a neighborhood into which people want to buy?

Once the lot is "ready", then talk to some builders about what they'd charge to build a small, simple house. Since you obviously aren't attached to this lot and are looking at it as a temporary fix, choose a floor plan that's very generic and will appeal to many people. In your situation, the goal is always to own the smallest house in the nicest neighborhood; that's the easiest house to re-sell.

Is $1200/month a reasonable price for a mortgage in your area? It would be fine here, but I know that's not true everywhere.
I have the impression this'll be a financial stretch for you. Don't go too close to the financial edge; that's never a good idea. If you have to wait 'til your student loans are paid off, do it. Those things are crippling.

I'd start by talking with an experienced realator in your area to find out what s/he thinks the property is worth and what comparables in your area for improved lots may be.

You should talk to a bank for exploration of lending terms.

You should talk to the applicable regulatory agency for their building and permit requirements and costs.

A reputable builder or two should be able to give reasonable, but ball-park costs for various types of construction, ie, 1-story, 2-story, etc.

Talking to an architect or designer will give you an idea of these costs.

You have a lot of due diligence to do before making a decision to do anything. Good luck on your project.

What you're talking about doing here is building a house on spec. Even experienced builders are losing their shirts doing that right now. Even if you 100% built it with your own hands, you wouldn't save enough from that for any significant profit from the venture. And, it would take a ton of your time and energy. If you are looking to build something for you to inhabit, that's one thing. You'd still be better off by buying something existing. It's cheaper, and it sounds as though your budget can't take the hit of even doing an conventional home purchase right now.

Really, this inheritance is nothing but an albatross around your neck. With all of the questionable structures on it, you're lucky that the municipality doesn't classify it as an attractive nuisance and make you tear it down right now. Your best bet would be to sell it as quickly as possible for however much you can get for it and apply that towards your student loans. In Texas, land is the absolute cheapest part of the home building equation. And unless this is located in a VERY desirable spot, no way are you going to do a spec home and come out ahead.

This would be an excellent question for Dave Ramsey, who hosts the call-in show for financial advice and alot of callers ask similar questions to this w/ specific housing questions, etc. and what the best option is for them. I'd do that before anything so you can get an understanding of how taking advantage of this inheritance will work the best for your situation. You can find his show and when to call on the link below. I listen to his show all the time and find it very valuable!

Here is a link that might be useful: Radio Show

I don't know what you ought to do, but I will tell you about what our process has been to build on our own lot.

We started by asking around for recommendations of builders. You could also go on the parade of homes to try to find builders. We took the design/build route and are building a custom home, but since cost is a big issue for you, I'd recommend picking among plans the builder builds regularly, because he can probably build those plans more cheaply than a house he's never built before.

Then you can get quotes for the plan(s) you're interested in. Make sure the quote is as complete as possible-- if there's an allowance, price out what you want and make sure the allowance is sufficient. Then add in a buffer for whatever you and your builder forgot to account for. Once you've got it all worked out, you will sign a contract with the builder and apply for the construction loan.

The bank will want to ensure 2 things: that you can afford the loan, and that the property (house+land) will appraise for what you will owe when it's finished. If you are approved, and appraisal is good, then you can go forward with seeking the building permit.

Once you have a building permit, then you can start building.

Payments for your construction loan begin as soon as your builder starts drawing money from it. There will be procedures in place to ensure that your builder only takes money as he needs it to build your house-- he can't take the full amount immediately.

FWIW, I'd do as much as I could to clear out the old mess before getting the builder involved. The bank doesn't want to see any kind of construction having begun before the loan closes, but you could certainly clean up the lot. And that will probably be a good thing even if you decide that you're better off selling the lot.