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Last updated on 2024年6月6日

How does cash for keys compare to other loss mitigation options such as short sale or deed in lieu?

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If you are facing foreclosure, you may have heard of cash for keys as a way to avoid losing your home and damaging your credit. But how does this option compare to other loss mitigation strategies, such as short sale or deed in lieu? In this article, we will explain the pros and cons of each option and help you decide which one is best for your situation.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private…

1 What is cash for keys?

Cash for keys is an agreement between you and your lender, where you voluntarily move out of your property and hand over the keys in exchange for a lump sum of money. The lender then sells the property to recover some of the debt. The amount of money you receive depends on several factors, such as the condition of the property, the market value, and the lender's policies. Cash for keys can help you avoid the legal and emotional stress of foreclosure, as well as save you some moving expenses and relocation time.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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? Negotiate the offer: Don't be afraid to negotiate the cash amount. Research similar properties in your area to get a sense of a fair market value. ? Plan for relocation: Use the cash to secure a new place to live. Remember, finding a new home takes time, so factor that into your moving timeline. ? Seek professional guidance: Consult a housing counselor or attorney to ensure the agreement protects your rights and offers the best outcome for you.

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2 What is short sale?

A short sale is when you sell your property for less than what you owe on your mortgage, and your lender agrees to accept the proceeds as payment. You need to get the lender's approval before listing the property, and you may have to negotiate with them on the price and terms. A short sale can help you avoid foreclosure and reduce the impact on your credit score, but it can also take a long time, involve a lot of paperwork, and leave you with a deficiency balance that you may have to pay.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Consider short sales only after exploring all other options. Negotiate a loan modification with your lender or try to sell the property traditionally first. - Gather documentation meticulously to ensure a smooth process. This will expedite the lender's approval and avoid delays. - Be prepared for a lengthy wait; patience is key. The short sale process can take several months.

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3 What is deed in lieu?

A deed in lieu is when you transfer the ownership of your property to your lender, and they cancel your mortgage debt. You need to get the lender's consent and meet certain criteria, such as showing that you have no other liens on the property, that you have tried to sell it unsuccessfully, and that you are experiencing financial hardship. A deed in lieu can help you avoid foreclosure and simplify the process, but it can also affect your credit score, trigger tax liabilities, and limit your eligibility for future mortgages.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Consider renting back the property for a few months while searching for a new place. This can ease the transition and potentially improve your chances of getting a good recommendation from the lender (who will now be your landlord). - Explore tax implications with a financial advisor. While you might avoid some debt, a deed in lieu can trigger a cancellation of debt income tax liability. - Be prepared to explain the deed in lieu to future lenders. Having a documented hardship story and proof of responsible financial management post-deed in lieu can improve your chances of future loan approval.

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4 How to compare the options?

When comparing cash for keys, short sale, and deed in lieu, there are several factors to consider, such as the money you receive or owe after the transaction, the length of time it will take to complete the transaction, and how it will affect your credit score and history, tax situation and potential deductions, and future ability to buy another property. Each option has its own benefits and drawbacks and the one that is best for you depends on your individual and financial situation. It is important to seek advice from a loss mitigation specialist, real estate agent, tax advisor, and lawyer before making a decision.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Consider your emotional well-being. Foreclosure can be a stressful process, while a deed-in-lieu or short sale offer more control. - Factor in moving costs. Cash-for-keys programs often include moving assistance, easing the financial burden. - Weigh the impact on future opportunities. Short sales may be less damaging to your credit score compared to a foreclosure, potentially affecting your ability to secure loans for future homes.

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5 What are the tax implications of cash for keys?

One of the most important factors to consider when choosing cash for keys is the tax implications. Depending on how the lender reports the transaction to the IRS, you may have to pay income tax on the amount of money you receive, or on the amount of debt that is forgiven. For example, if you owe $200,000 on your mortgage, and the lender pays you $10,000 to move out, they may report that they paid you $10,000 in income, or that they forgave $190,000 in debt. Either way, you may have to include that amount in your taxable income, unless you qualify for an exclusion or exemption.

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Anass Maksi

Chief @ BrightStar Protective Services | Security, Risk Management, Axon Taser Master Instructor & Training, Private Investigator, Fugitive Recovery Agent
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- Negotiate the payment method: Cash for keys can be structured as a relocation assistance payment or debt forgiveness. A relocation payment typically has lower tax implications. - Consult a tax advisor: Tax laws are complex and can vary by location. Understanding how the specific agreement will be reported to the IRS is crucial. - Document everything: Keep copies of all agreements and receipts related to the cash-for-keys transaction. This will be helpful if you need to prove your case to the IRS.

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6 How to avoid or reduce tax liability from cash for keys?

In order to reduce or avoid tax liability from cash for keys, you may be able to take advantage of the Mortgage Forgiveness Debt Relief Act, declare insolvency, file for bankruptcy protection, or negotiate with the lender. The Act allows you to exclude up to $2 million of forgiven debt on your primary residence from your income, if the transaction occurred between 2007 and 2020. Insolvency means your total debts exceed your total assets at the time of the transaction and bankruptcy protection means filing for Chapter 7 or Chapter 13 bankruptcy. Negotiating with the lender may also allow you to treat the transaction as a sale instead of a forgiveness. However, these options may not apply to everyone and have other consequences that need to be considered, so it is best to consult a tax professional before accepting cash for keys.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How does cash for keys compare to other loss mitigation options such as short sale or deed in lieu?

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1 What is cash for keys?

2 What is short sale?

3 What is deed in lieu?

4 How to compare the options?

5 What are the tax implications of cash for keys?

6 How to avoid or reduce tax liability from cash for keys?

7 Here’s what else to consider

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