<p>My kid has been accepted to a private institution, and we are very pleased with both the school, and the financial aid package offered. I am self-employed, and I believe my job opportunities would be much better if we were to move to another town, but even then, the additional income would not be so much as to make a big difference in our FA.</p>
<p>So the question is how to transact the selling of our current home and purchase a house worth 3X as much, but still not even $300K (low end for the market we want to move to). Is there any way to do this without materially changing the FA package we have been offered? We have:</p>
<ul>
<li>miniscule income and non-IRA liquid assets</li>
<li>our current home free & clear</li>
<li>excellent credit</li>
<li>two sizable Roth IRA's</li>
<li>the possibility of getting loans from a relative</li>
</ul>
<p>Thanks for any input to everybody.</p>
<p>If you have a house free and clear and good FA then it sounds like the first home is not counted by your school. If that is the case you can go ahead with a purchase contingent on selling your old home. That will at least keep you from the two house problem.</p>
<p>In particular, if you sell your current home after filing the FAFSA for 2012-2013, and purchase your new home before filing the FAFSA for 2013-2014, there should not be a lump of funds sitting in your bank accounts that might be assessed. My guess is that if you buy a $300K house after selling a $100K house that you won’t have a huge amount of equity in the new house even if the school does assess equity.</p>
<p>I was hoping to use Roth IRA distributions for a very large downpayment, but that’s really looking grim.</p>
<p>What would be the ramifications if we were to borrow money from a relative to enable us to make a very large down-payment on our new residence. … have this drawn up with legal documentation, pay interest, and use the property as collateral for the loan? We would pay back the loan, after college is completed, and we can cash out the IRA’s.</p>
<p>Would loan proceeds in that situation be considered income?</p>
<p>I think you need to talk to a financial advisor about this. If you are putting up the house as collateral for the loan, I would think it would be considered a legitimate “loan” and not income. But, there can be some fairly complex rules involved. Why are you waiting until after college to cash out the IRAs? Is this an age issue, or are you holding off because it will be considered “income”? Since you are self-employed, have you looked into setting up a self-employed 401K? Some of the plan sponsors will allow you to roll over IRAs into their accounts. Then you can borrow against your 401K equity. You do have to pay the loans back with interest, but it all goes back into your own account (so you’re paying yourself back with interest). I don’t know your specific situation, or how much you might have saved in retirement accounts, but this might be an angle you could explore.</p>
<p>Shouldn’t be. A loan from a relative that has all of the legal documentation along with it is no different than a loan from a bank (I think). However, if the loan from the relative has better terms than you can get commercially, the IRS might look at the difference as income. That means if a commercial mortgage is running 4%, you should probably pay your relative 4% (check the IRS rules to see if you can pay a slightly lower rate) plus interest must acculmulate during the 4 years of non-payment. If bank loans require “points” you might not have to pay those to a relative since it’s a fee.</p>
<p>Thank you for your replies. Turning the IRA into a 401K which I could borrow against is an interesting idea. If a loan from a relative would not be considered income, that probably is simpler, and (I don’t know, I’ve never brought the subject up) perhaps advantageous to my relative, who I know is very risk adverse in his investments.</p>
<p>Are you planning on getting a bank mortgage as well? It has nothing to do with FA, but the mortgage company won’t let you get a “gift” over a certain amount and you will have to prove it’s a legal loan. I just say this because the loan of the down payment could affect your chance at getting the mortgage. Maybe you already knew this, I just wanted to mention it in case you didn’t.</p>
<p>Well actually I’d like to be able to pay all cash, but more likely there might be a small mortgaged amount. That seems very strange that a lender would “not allow” my receiving of a cash gift. After all, that would only improve my ability to manage mortgage payments. Besides, what business is it of theirs?</p>
<p>If your child will be attending a CSS Profile school and a relative holds a loan against your property, some schools won’t accept that. Instead, it will look like you have all that equity in your home…which many CSS schools will consider.</p>
<p>This came up in another thread. It seems like schools think that loans from relatives to buy homes are just a way to “hide” equity…even if the family can show that money changed hands, and documents were signed and notorized. </p>
<p>While a financial advisor may be able to tell you what’s best to do tax-wise…most have no clue as to how these things affect college financial aid…and they often “guess” wrong.</p>
<p>No matter what you do at this point will change the FA pkg that you have in hand. The concern is what happens for next year’s FA pkg based on what you do this year (withdrawals from retirement accts) and where money is sitting.</p>
<p>It’s never been clear to me what happens when you sell a home and use profits towards another home during this time. Are those profits income that affect aid? I’m not asking about tax issues…since it’s ok to use profits from the sale of one primary home to buy a pricier primary home. But how might it affect FA?</p>
<p>My knowledge is slightly limited on this, but I cashed out equity on one home to purchase another this year. If you own both homes simultaneously at the time of filing, you will inevitably end up needing to show your equity on the non-primary/homestead home on the FAFSA. That equity will make a difference in your Fed EFC for certain.</p>
<p>So, you may wish to sell first (since your house is paid, ergo showing the most equity) and purchase subsequently.
You may also wish to look into using your 401k as your mortgage source IF the proceeds from your home plus the contents of the 401k/SEP are sufficient to cover the new mortgage entirely. If you did all of the foregoing, you will still be showing that equity of your new home on your CSS, but not on FAFSA.</p>
<p>Proceed with caution if you’re happy with the current package – and be prepared in the event any move nets a change. CSS essentially entitles them to cast light on any perceived shell games, which is why I wouldn’t dally with family loans, etc.</p>
<p>The bank will let you have a “loan” assuming you can pay it back. If you claim you got a gift (over a certain amount) I think they view it as a LOAN that you have to pay back. Otherwise, people who got large LOANS could say they were gifts, but really if it is a loan that they have to pay back, then they might not be able to afford both the mortgage and the gift/loan. Does that make sense? Some banks don’t let you finance your down payment which is how they would view it. They would likely allow the “gift” of the amount that the IRS allows per year. Basically, I think you have to show where the $ for the down payment came from and whether or not you have to pay it back.</p>
<p>I’m not positive about this, but I’m pretty sure the question was asked on the mortgage app we had long ago. If you are using a lot of cash and only financing a small % of the home then it shouldn’t matter. SOmething to ask a mortgage company if you plan on using one. Just pick one and call to ask a hypothetical based on your plan.</p>