<p>It's been stated that "Investment debt means only those debts that are related to the investments." </p>
<p>What if second property was purchased with personal loans from friends and family instead of a bank loan for various reasons. I know technically this does work, like a home equity on primary residence used to pay for second home, but are those "family & friends" loans justifiable to count as debt related to the investment. Where does it say specifically the associated debt to the investment has to be a bank mortgage contracted to the second house? - thanks</p>
<p>“Where does it say specifically the associated debt to the investment has to be a bank mortgage contracted to the second house?”
It doesn’t say that specifically anywhere to my knowledge, because AFAIK it isn’t true.</p>
<p>Do you have written loan agreements? Are you paying interest at a market rate?</p>
<p>Your friends and family are moderately crazy for not having a secured interest in the property, but whatever works.</p>
<p>combo of promisory notes and handshakes…(we love and trust each other)…and its not as much as you may think, plus they get plenty of use of the place.</p>
<p>but this is the point: if you could prove-validate your debt is directly related, why not, a personal loan or even home equity on primary residence, if it is a more personally beneficial way of borrowing money. If it is truthfully related, why does it have to be a contracted mortgage. My guess is FAFSA wants real specific legal proof, because people will make up stuff to get more money.</p>
<p>The home has to LEGALLY be secured as collateral for the loan to be considered for that home.</p>
<p>“they get plenty of use of the place”. Is it really an investment or is it really a second home?</p>
<p>understood - “Legally secured” is what I meant by “legally proveable”, although secured is accurate and more specific - thank you</p>
<p>is there any place in the FAFSA instructions - documentation where it states this explicitly?’</p>
<p>thank again</p>
<p>property is seen as both an investment and is used…but doesn’t FAFSA include both an investment property and second residence under the general category of parent asset…</p>
<p>does it make a difference, and if so, under what credentials is it determined how is it categorized?</p>
<p>thanks</p>
<p>The market value of any property has to be listed and is defined as the gross market value less any secured loans on it. You cannot take all of your unsecured loans and put them against the value of those properties and thus reduce the value of it. If you are selected for verification, they will want to see the liens on the properties or deny those loans as such.</p>
<p>I would wonder how “family loans to each other” would be viewed. It could be seen as a way to hide assets by pretending that there is a loan against the property. Perhaps evidence that money really changed hands would need to be demonstrated.</p>
<p>Documentation would not be a problem. There’s the property purchase contract, bank checks and account statements showing exchange-transfers of monies, dates, even a promissory note, email conversations, and if necessary, personally sworn testimony could be provided, etc. </p>
<p>But that would all be moot, as stated, if only legally secured-to-the property debts are acceptable.</p>
<p>I was thinking, personal loans could be “forgiven” (even as part of a pretending scheme as you say). I guess legally secured debts are not something they have to worry about being real, so I understand the necessity a little more, but don’t necessarily agree with it.</p>
<p>The FAFSA instructions on the FAFSA form say only “Net worth means current value minus debt.” and “Investment value means the current balance or market value of these investments as of today. Investment debt means only those debts that are related to the investments.”</p>
<p>It says nothing about the debt having to be secured.</p>
<p>
cptofthehouse, can you point to something that spells out that it has to be secured for FAFSA purposes?</p>
<p>It’s certainly not true for IRS purposes.</p>
<p>So you can subtract any debt you have from another home or current home you have saying that it was for that purpose. I don’t think so. The wording is not there, but it is clear that the debt has to be related to the investment. If audited, you would have to show the evidence, and the word of your friends is not going to fly.</p>
<p>I found several places where it says debt needs to be secured before it will count on Fafsa. I don’t know what you mean about IRS. Are you saying IRS lets you deduct interest for a home even if the loan is “under the table.”?
[Last</a> of 7 Parts: Answers on the Fafsa and Financial Aid - NYTimes.com](<a href=“http://thechoice.blogs.nytimes.com/2010/01/24/fafsaq-and-a-part-7/]Last”>Last of 7 Parts: Answers on the Fafsa and Financial Aid - The New York Times)
[FinAid</a> | Financial Aid Applications | Maximizing Your Aid Eligibility](<a href=“Your Guide for College Financial Aid - Finaid”>Maximizing Your Aid Eligibility - Finaid)</p>
<p>Here is how I’m reading this thread…to the OP…please correct me if I’m wrong.</p>
<p>The OP has a second property…sounds like it is worth a pretty penny and will have to be listed on the FAFSA as an asset. The OP is trying to figure out a way to diminish the value of this second home for financial aid purposes. Right?</p>
<p>Unless you have REAL secured loans…you will not be able to reduce the equity of this second home. ANYONE could say that grandma or neighbor or whomever “loaned” them money for a home that is fully paid for. The colleges have seen it all. If you are selected for verification (and if you are doing this so that your FAFSA EFC is low enough to qualify for significant federally funded grant money), you will have to show proof that these loans are secured loans. And a word of mouth letter or a statement from a friend or relative will not suffice. We were verified FOUR times (and we didn’t even GET need based aid)…in all four cases, we had to get information from the BANK about our mortgage balances (ours were Profile schools).</p>
<p>
For investment rental property, you fill out schedule E. There are two lines for interest on this form - one for “mortgage interest paid to banks”, the other for “other interest”.</p>
<p>I’m not sure what you mean by “under the table” for a loan, but if you have loan agreements and a paper trail for a non-secured loan, the IRS will let you deduct the interest as “other interest”. Even things like credit card interest paid for items used on the property are deductible.</p>
<p>If the property is not an investment property but is a second home, you can only deduct mortgage interest. A mortgage is be definition a secured loan.</p>
<p>I can’t say what happens when you get verified, it has never happened to me. I just pointed out that the wording on the FAFSA form and instructions says nothing about the loan needing to be secured.</p>
<p>Valuing the property for FAFSA purposes is more of an art form than a science anyway. Just by being aggressive in coming up with a value, you could probably accomplish the same thing. I doubt you have to go get an official appraisal if you get verified.</p>