If you find yourself facing foreclosure of your home due to defaulting your loan, you may be eligible for a deed in lieu of foreclosure offer from your lender. Foreclosure and eviction are cumbersome and expensive for banks, so some will offer a "cash for keys" incentive for homeowners to move out sooner, rather than remaining in the home through the foreclosure and eviction process.
What is a cash for keys arrangement?
In exchange for your voluntary vacation, usually a period of 2 weeks to a month, the bank will offer a cash incentive. This money could be used to help you with relocation costs associated with moving your belongings out of the home and securing a new residence.
Why would a bank pay residents to leave?
Banks aren't in the landlord business – that is, they would prefer to move a foreclosed home out of their possession as quickly as possible, recouping as much of the loss from that loan as they can. If they must go through the full legal foreclosure process, this costs them money – money not being paid on the home loan, money for attorney's fees, and lost income from the home loan's interest. It can cost the bank tens of thousands of dollars to foreclose on a home and go through the court proceedings. In addition, some homeowners, when faced with eviction, deliberately damage the property. The bank would thus be responsible for repairing the house in order to place it into a saleable condition.
How much will banks pay for a homeowner to leave?
There are several things that a bank will pay to induce a homeowner to vacate the property and leave it in good condition:
- Security deposit, and first and last month's rent at the new residence
- Movers or a rental moving truck
- Deposits for utilities at the new residence
- Temporary stay in a hotel or motel
Bear in mind that banks are not obligated to pay for any of these things. The business transaction between the homeowner and the bank is a home loan with repayment terms. The home loan doesn't cover incentives to move out quickly when facing foreclosure. It is in the bank's best interests to have foreclosed residents leave as soon as possible, however, hence the incentive.
What can the homeowner in foreclosure do to receive cash for keys?
First, as in all business dealings, be polite, courteous, and fully comply with any terms of the agreement. Ask for the amount you really need – don't try for more than is necessary, or it could backfire. If you do receive a deed in lieu of foreclosure offer, ask that the offer be placed in writing, including the full amount, the date you are to vacate, and stipulating that this is not a loan with the expectation of repayment.
You may also be able to receive free counseling services from your local Housing and Urban Development (HUD) office. HUD has trained housing counselors specializing in helping homeowners understand the foreclosure process and determine your eligibility for the program. They may also be able to review any offer you receive from the bank, looking after your interests.
Some things to be aware of
Never accept a "cash for keys" offer from anyone other than a representative of your lending bank. Verify the identity of the individual making the offer with your bank's office, or ask your HUD counselor for assistance if you suspect that this is a scam.
Leave the house "broom clean" – remove all your belongings and furniture, as well as trash and debris, from the property. Ensure that all fixtures, including appliances that you don't own, remain in the house. Landscaping and the premises should be left intact, and the house clean, with floors swept. All keys and remote door openers are to be surrendered to the bank. Before you move out, the bank will inspect and appraise the home – so if you aren't compliant with this part of your agreement, it could nullify the deal.
The foreclosure process typically takes around six months, so some homeowners may have six months in the foreclosed house before they actually are removed from the property. Although vacating your house for a new residence in as little as a month's time isn't ideal, the concept behind a cash for keys incentive is to offset the unexpected relocation expenses the vacating tenant may incur. This allows the bank to prepare the house for resale quickly.
Bear in mind that a Cash for Keys in lieu of a foreclosure may not keep an actual foreclosure from appearing on your credit report; the delinquency on your loan that caused this situation may still be reported to credit bureaus. If you are concerned with how a "deed in lieu of foreclosure" will affect your credit, consult with a professional credit counselor.