Constabulary,I actually tried your way and it did the same thing. But I did a little experiment and I got the same result from threading it the way you suggested and the original way I had it:
1. They top threading still had the same effect (which suggested the top tension was too tight because the thread up top was in a straight line(like the pictures above)
2. When I changed the thickness of my material, (the thicker the better) it stitched perfectly.
I took 2 pieces of suede which is what I will be using to create my product, but the thickness got me the top tension line again. And I did on 2 pieces of upholstery leather and got the same thing....
SO now the questions lays, is there a certain needle Im suppose to use?