I want to buy a house the owner has a second mortgage on it?

We have been renting to own a house. We have been saving up for the down payment. We have been rent to own for over 2 years. The owners have been using all of the rent to make house payments. They told us we will only owe the balance of the loan. We have found out that the owners have recently taken out a loan using the house (is this a second mortgage?). They told us that it won't affect what we buy the home for (they verbally quoted a price). How can they sell us the house if they borrow money against it to buy another home? How do we protect ourselves without getting robbed by lawyers? We have never done anything like this before so we are blind to what can happen to us. I read if they default on the loan that we could loose the home even if we buy it from them. Also, we heard they had some back tax problems from something else.

You will not be effected by tax problems with "something else". Taxes do not jump properties.

However, they have to be able to pay off ALL liens on the house, including both loans, in order to sell you the house.

It does not matter if they quoted you less, the bank will not let them sell it to you for less then what is owed.

Do not worry about sellers mortgage or loan .
You suppose to have a contract of sale signed when you moved into the house, specifying that it is rent to buy and the amount of the rent goes thourds the down payment and you need only a balance for the agreed price, not whatever the seller owns to the Bank.
You should get a contract of sale and a letter from your Bank for the balance before he goes bankrupt .
And you should get a report for the title to be free and clear of any judgments or liens.

You have told us two different things.

"They told us we will only owe the balance of the loan." which implies if the loan is $100K, you are buying the house for $100K.

"They told us that it won't affect what we buy the home for (they verbally quoted a price). " Implies that they are selling you the house for $120K and assuming the $100K loan--and giving them the remaining $20K as cash. They will use the cash to pay off the second mortgage at closing. (How much of the downpayment is coming from your rent? Any?)

Get a Realtor, they aren't that expensive and there fee can be added to the mortgage. i wouldn't buy it if it is thru a friend and u take over payments. when u get your mortgage the funds u send the owner will automatically be applied to the mortgages first and second ones. I recommend talking to your mortgage broker.

Do you know if the lien is recorded against the property you intend to buy? It's not a big deal even if it is because when you put your loan together the lender will require a title search to be done and all liens will be cleared from that property either at closing or prior to in order for your lender to be in first position. The new lender will also be diligent in ascertaining if there are indeed tax liens. The lender you go with is not going to put themselves in a position where their collateral is at risk.

You should have a rent to own contract with your landlord. If you simply have a residential lease with no stipulation about buying the house then you are a renter and nothing more.

If you don't have anything in writing stating that you will buy the house for "the balance of the loan" then you do not have any price negotiated. You need it in writing that you will be purchasing the house for the balance of XXX loan at XXX bank.

You are correct however, that if they have used the property to secure another loan then if they sell the house to you the second loan will become due in full. If they don't have the money to pay it then they won't be able to sell the house.

Red flags. And I'll try not to overcomplicate this, but it is a bit complex.

It really sounds like you do not have a contract here, since you were verbally quoted a price. If you don't have a contract or a written purchase price, get one. Today.

The owners can sell the house to you at the "verbal price" if it enough to cover what is owed on the loans, or they come up with some additional monies to pay the balance.

When you buy the home, the lender will have to be paid to have their lien removed (a lien is basically a monetary interest in real property). Once you have clear title, whatever else this owner did or didn't do will not effect you. Be sure to use a title and escrow company to help with the closing. The title company will do a search to check for any liens or judgments that "cloud" the property, which will have to be resolved by the owner before you take title.

It is possible there is a tax lien on this property, tax liens can attach to any real property someone owns, depending on the type of problem.

I know alot of this sounds like lawyer-ese, but it is really not. If you need additional info, feel free to email me.

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