Should I have my lawyer present at signing and have it notarized?

You will get the deed showing ownership a few weeks after closing but it will have a notation of the financing instrument and where that is recorded (book and page).When you pay off the loan, you will get the original note with the release signed and notarized and a few weeks later you will get the original copy of the release the lender will file with county releasing the lien.

All monies paid to Seller shall be retained by Seller as sole liquidated damages.8)COSTS OF IMPROVEMENTS: In the event the Tenant/Buyer exercises the option to purchase set forth in paragraph (4), above, and through no fault of the Tenant/Buyer, the Landlord/Seller fails to convey said property to Tenant/Buyer in accordance with the terms of this Lease/Option, the Tenant/Buyer in addition to any other rights which Tenant/Buyer may have in law or equity for the enforcement of the Tenant/Buyer's option to purchase shall also be entitled to reimbursement for the cost of all repairs, maintenance, and improvements.9)FURTHER ENCUMBRANCES: The Landlord/Seller hereby warrants that the total of the leases, options, mortgages, liens, and any other encumbrances against the property, whether of public record or not, are current, unless otherwise noted, and are as follows:__________________________________________________________________________________________________________________________________10)CONVEYANCE: The Landlord/Seller agrees not to lease to another third party, nor assign, sell, option, transfer, pledge, or otherwise to convey any or all rights or interests had by Landlord/Seller in the property or in this Lease/Option agreement.

If he is able to provide legal documentation (i.e. notarized note, drawn up by a lawyer, or whatever documentation he may be able to show), is there a way that the money above and beyond what is owed on the mortgage can go directly towards paying off the debt, or does it have to go to the seller first, and then paid out by him to his other debts?

Establish a business plan with objectives and goals and formally sign the document with your kinfolk (notarized?).

If not, are there any others?

Further, the Agent has to sign (and notarize) an Affidavit confirming that the home was available to the public at large and that open market competition was gained for a minimum of 5 business days. 

Do these documents need to be notarized in Pennsylvania at the time of signing?

It also has to be notarized I believe.

You would need to have it notarized by someone recognized in the US system (you can usually get this done at a consulate).Defiantly consult with an attorney so she can't come back latter and claim she still has a half interest in the property.