After reading a lot about the REI industry I feel like this is this perfect fit for me.

A 1031 is a perfectly viable vehicle to move the equity into new properties, although you need to consider the transactional costs when making this decision.

Works perfect for my needs, but others maybe not.

If someone tells you there is a perfect investment with a guaranteed return and no downside you need to run very fast from that person. 

I want to be owner occupied as well to make things as easy as possible so the FHA sounds perfect.

A release of lien will be sent by the lien holder, they have a statutory time requirement to do so, the release is usually sent to the borrower on the note, they will need to take it to the Recorder of Deeds and pay the filing fees to have it filed, at which time the release is perfected and clears the lien.

Tank has run dry twice in the past 7 months. 

Chris,Being nervous is perfectly normal when you have so much money on the line.

I think it was a pretty perfect 50/50 split for people who even wanted a tub in their master.

NOTE this is more than the $135k the property is worth but she would be collecting every penny and more over the term of the note.With that being said those are 2 valid options and they can be played with or tweaked to provide the perfect deal.For Example:If she comes back and says the 18k has to be paid off and is not willing to risk her credit being damaged and trust you to pay the mortgage on time go with Option 1.If she says she wants to increase her income by $500 per month and that $300 and change will not cut it.