Can someone qualify for an FHA loan if there is a record of a foreclosure on a timeshare? There really is quite a bit in that simple question and it deserves some attention to fully explain this topic as it relates to FHA loans, timeshares and foreclosures. Let’s take a closer look at this question to determine what sort of impact a foreclosed timeshare has on a credit report and how FHA lending guidelines treat this scenario.
FHA loans are one of three government-guaranteed mortgage loan programs available in today’s mortgage marketplace. The other two programs are those underwritten to VA and USDA standards. FHA loans have this guarantee which compensates the lender should the loan ever go into default. This is one of the reasons lenders feel more comfortable when evaluating an FHA application. As long as the lender approved the loan using FHA standards, the guarantee is in place. This guarantee isn’t free but is funded by two separate forms of mortgage insurance. An upfront premium that is rolled into the loan amount and an annual premium that is paid in monthly installments.
FHA loans aren’t limited by location nor to a particular segment of borrowers as anyone can apply for an FHA loan. FHA loans do have limits based upon the loan amount and the borrower must occupy the property as a primary residence. FHA loans are also popular with first time home buyers due to the ease of qualifying as well as the low down payment required. FHA loans ask only for a down payment of 3.5% of the sales price of the home.
What exactly is a timeshare as it relates to real estate? A timeshare is a property where there are multiple owners and a legal interest is divided among the owners accordingly. The origin of timeshares probably came about in Europe after WWII as families exchanged residences over the course of the year used as a vacation home. People could get together and buy a vacation home or villa and agree to its use based upon various times of the year. For example, 12 families agree to buy a beachfront home and each family gets exclusive use of the property for one month out of the year. Or, the agreement could be for two weeks out of the year or whatever the owners decide.
Individual owners can take their time as a vacation spot each year and they can also rent out their timeshare to others. Timeshares can legally be given to a third party as a gift without the other owner’s approval. Owners can exchange timeshares among one another and switch times of usage or they can sell their timeshare. Today, it is more common for a developer to buy a property and then turn the property into timeshare ownership. The more popular the time of year for an individual share, the more expensive it can be. For example, a timeshare over the holidays or during the winter months for a property located in warmer climates such as Florida or Hawaii will typically sell for more compared to other times of the year when vacationing is less popular.
A foreclosure takes place when the owner of a property fails to make the monthly payments due. A foreclosure is typically the action of last resort as the legal fees and lost interest can be extremely expensive. In most cases the lender works out a repayment plan or a home loan modification where the terms of the original note are changed to more accommodate the borrower’s current financial situation. Depending upon local and state statute, foreclosures can take place rather quickly or can require several months. For example, in states where foreclosures must be filed with the court system and brought before a judge takes longer than in areas where no such court appearance is required. In states where a judge must approve a foreclosure, the state is considered a “judicial foreclosure” state.
FHA, Timeshares and Foreclosures
Typical FHA guidelines require a specific waiting period if there is a bankruptcy or foreclosure in a borrower’s history. If there is a foreclosure, there must be a three year waiting period before a new FHA loan can be granted and credit must be reestablished. In the instance of a Chapter 13 bankruptcy, there is a one year waiting period and with a Chapter 7 bankruptcy there is a two year waiting period.
But how does a foreclosure on a timeshare work? Obviously the lender can’t foreclose on the property when there are other owners who are not experiencing any financial difficulties but what happens when someone can no longer pay for their timeshare? The servicer, which is the entity collecting the payments each month, can initiate a foreclosure on a timeshare due to non payment.
However, due to the unique nature of a timeshare, even if a timeshare is surrendered, FHA guidelines do not consider a timeshare foreclosure as a real estate foreclosure which would then trigger waiting periods. Instead, FHA recognizes a timeshare transaction as a consumer loan, not a real estate loan. Therefore, an FHA loan can be used in this situation. Finally, note that all other FHA qualifying guidelines must be met, but a timeshare foreclosure is not the same as a lender taking back a property due to default.