A timeshare is a type of ownership interest in real estate. The owner of a timeshare actually owns an undivided portion of the property, but only for a specified amount of time each year. Regardless of the technicalities, a timeshare is a real property interest, and as such can be used to secure a mortgage. Similarly, a timeshare interest in real estate is subject to foreclosure if the owner defaults on the mortgage loan.
If the borrower under a timeshare mortgage loan does not make the required monthly payments, then the lender has the right to foreclose on the timeshare interest. Foreclosure allows the mortgage lender to raise money to pay off the mortgage loan by selling the timeshare in a public auction. Because state laws closely regulate mortgage lender foreclosure actions, foreclosure on a timeshare can become a time consuming and expensive process for the mortgage lender. The lender generally must hire a foreclosure servicer, such as an attorney, and must pay court costs and publication costs.
A warranty deed is a legal document that a property owner can use to transfer a title to real estate to a new owner. The use of a warranty is a voluntary conveyance of the timeshare. In the foreclosure scenario, some mortgage lenders will accept a warranty deed on the timeshare instead of carrying out state law foreclosure on it. Either way, the borrower loses title to the timeshare, while the mortgage lender either becomes the owner of the timeshare or has the right to sell it. The warranty deed in lieu of foreclosure simply allows mortgage lenders to avoid the time, hassle, and expense of formal foreclosure.
Risk and Reward
From a timeshare owner's perspective, a warranty deed in lieu of foreclosure can provide important benefits. Specifically, in some states, the mortgage borrower can remain on the hook for any unpaid balance on the mortgage even after foreclosure. The unpaid balance, called a deficiency, arises if the foreclosure produces a sales price that is less than the amount due on the timeshare mortgage loan. However, when using a warranty deed in lieu of foreclosure, the borrower may be able to negotiate with the mortgage lender to forgive any deficiency or unpaid amount on the mortgage. Again, lenders will bargain in this manner in order to avoid the time and expense of formal foreclosure. A warranty deed in lieu of foreclosure may provide the best option for the timeshare owner to get rid of the timeshare and the mortgage on the timeshare at the same time, without any lingering questions of future liability for a deficiency.