This deal probably won't work with the existing debt because he's defaulted on his debt by skipping payments and the due on sale clause in the mortgage will prohibit you from taking it over without him paying the mortgage in full.

No, prohibited transaction rules will prevent you from using your 401k to directly purchase anything currently in your name.2.

The law in CA is very clear that the sanctity of the bonafide purchaser's title is protected as a matter of law but unfortunately there is no law that prohibits the owner from suing anyway and when they do you have to defend yourself. 

They will probably tell the seller its illegal or a huge risk (despite being explicitly prohibited from giving legal advice), and won't let you present the deal yourself, and will be dogde-y as you ask the necessary questions above.

There are buildings that prohibit anything but owner-occupants. 

Google it and see results like this:Under a DST, an investor is prohibited from entering into new leases or renegotiating current leases.

This is literally what I do, but I wouldn't qualify at my own bank(also regulations prohibited it).Any suggestions?

That's a prohibited transaction.

Being criminal is possible, but not by the contract with the bank (violating the bank contract is a civil matter); there are state laws in some places that prohibit "rent skimming" practices and make that a crime.

Here it is usually prohibited in rental properties - fire marshall will insist it be removed.