When you feel a sense of urgency to sell your home when behind on mortgage payments, the two options you will come across are short sale and foreclosure. Before you decide how to proceed, you should analyze your options to put yourself in the best position.
Here we discuss the difference between a short sale and foreclosure. And, we also share the best-kept secret 3rd option when you need to sell your Little Rock house fast, which beats them both.
Short Sale Vs Foreclosure
Short sales and foreclosures both refer to possible outcomes for homeowners perilously behind on mortgage payments. These options arise for those who don’t have the ability to pay off their debt or restructure their mortgage loan with their lender. Both outcomes allow the borrower to get out of the mortgage, albeit, with different financial injuries.
A short sale means that the homeowner sells the house for less than what is owed on the mortgage. The seller may take a financial hit on the house and their credit score, but the seller also has the opportunity to avoid an official foreclosure on their credit rating. A short sale needs to close prior to the foreclosure date set by the lender.
A foreclosure occurs when the borrower doesn’t make attempts to come to an agreement before the foreclosure auction takes place. The bank seizes the house and sells it, keeping all of the money from the sale to recoup their losses. Foreclosed properties are also known as REO properties when they are listed for sale by the bank.
The main difference between a short sale and a foreclosure timing.
In a short sale, the homeowner typically lists their home for sale through a Realtor for less than what is owed to the bank. This requires the bank’s prior approval because the sale is “short” of the balance.
The incentive for the bank is they can skip the costly and lengthy legal process of foreclosing. They also don’t have to deal with selling a house that needs work, as will most often be the case with homes that fall behind on payments.
Once it sells, the owed deficiency balance will be dealt with in various ways but the foreclosure was avoided.
Foreclosures are a legal action taken by a lender against a delinquent borrower to repossess the house in order to pay themselves back for the mortgage note. This is a final, legal action, and the bank is the new rightful owner of title to the house. They will then resell the house and try to recoup their investment. (At least, this is their goal.)
| Comparison Factor | Short Sale | Foreclosure |
|---|---|---|
| What It Is | The homeowner sells the property for less than what is owed on the mortgage, with lender approval. | The lender takes legal action to repossess the property and sell it to recover the unpaid loan balance. |
| Who Controls the Sale | The homeowner is still involved in the sale process, but the lender must approve the terms. | The lender takes control of the process once the foreclosure moves forward. |
| Timing | Must close before the lender’s foreclosure date, which can create time pressure and delays. | In Arkansas, the process may begin after about 90 days of delinquency, with a sale timeline around 120 days. |
| Lender Approval | Required before the transaction can move forward. | Not a voluntary approval process for the seller; the lender proceeds through legal remedies. |
| Documents and Process | Usually requires hardship documents, transaction history, listing paperwork, and a buyer contract. | Moves through a legal default and sale process rather than a standard marketed home sale. |
| Need for a Realtor | Often involves listing with a Realtor, plus commissions and standard closing costs. | Does not typically require the homeowner to hire a Realtor before the foreclosure sale. |
| Condition of the Property | Usually still needs to be marketed to buyers, which may involve prep, showings, and waiting. | Typically transfers as-is after repossession. |
| Credit Impact | Can damage credit, but may help avoid an official foreclosure on the credit history. | Creates a serious negative credit event that can affect future mortgage eligibility for years. |
| Deficiency Balance Risk | Any remaining balance after the sale still has to be addressed and may be resolved in different ways. | A remaining balance may lead to a deficiency judgment, depending on the situation and legal action taken. |
| Best Fit | Can be a better fit for owners trying to avoid foreclosure while still completing a sale before the deadline. | Usually happens when the homeowner does not resolve the delinquency or complete another sale option in time. |
Selling a House by Short Sale in Little Rock AR
A short sale property requires more time and effort than a foreclosure on the part of the homeowner. It is very difficult to sell your house without a Realtor in this way, and doing so means paying hefty commissions and closing costs, making “the numbers” even more challenging.
A debtor must provide the following documents to qualify for a short sale in Arkansas:
- Pre-audit with escrow officer contact information
- Second pre-audit with a discounted offer
- 12 month transaction history
- Hardship letter and income documentation
- Listing agreement
- Purchase and Sale Agreement, Listing Agreement, or Property Marketing Analysis (if applicable)
After you submit all documentation and get lender approval for the short sale, the sales process begins.
You will need to hire a realtor and prepare your short-sale home for buyers. Once you come to an agreement with a buyer, you will also need to go through the standard closing procedures (including closing fees and various additional fees) and market wait times. If you’ve also fallen behind on taxes, this balance will also need to be subtracted from the proceeds so the new buyer doesn’t own a home with a tax lien.
This is not a great option for Little Rock homeowners trying to sell their house fast to avoid foreclosure.
Foreclosure Sale in Little Rock, AR
The foreclosure process starts after 90 days of delinquency.
On day 91, the mortgage lender will give the account to a trustee who will then issue a formal notice of sale to the current residents. This will let them know the house will be sold in 90 days, making the total time frame before a trustee sale roughly 120 days in Arkansas.
You may still have options at this point, but your options diminish when you reach the 120-day mark.
Foreclosures will transfer as-is, meaning this process doesn’t require renovations, staging, or a real estate agent (or the realtor commission). However, this is a costly scar on your credit rating. Most people will have to wait as long as 7 years before they can qualify for a conventional mortgage again.
As a bank owned property, the home will be referred to as an REO property. This means it is “Real Estate Owned,” and will be listed for resale.
Once the property sells, and no matter the price, the money goes toward the borrower’s balance. Any remaining mortgage balance is known as a deficiency judgment. In some cases, the balance may be forgiven, but this is not always the case.
A judge may reward a deficiency judgment to the original lender following a nonjudicial foreclosure if legal action is taken within 12 months. The amount will be the lesser of the two:
- your indebtedness minus the property’s fair market value or
- your indebtedness minus the sale price
A foreclosure reflects badly on the defendant’s credit score, but it doesn’t impact your credit report significantly more than a short sale transaction. This makes both of these options undesirable.
Need help from a trustworthy investor who can buy your home fast, helping you avoid both of these options? Call Gary Buys Houses at 501-449-2897 to ask questions and get the process started!
Avoiding a Short Sale and Foreclosure
If you take action at the very beginning of the process, you may be able to maintain control over your home, assuming that you have adequate income and only fell behind due to temporary financial hardship.
The best thing to do once you fall behind is to contact your lender to ask about a mortgage modification or a second mortgage. Alternatively, you may find government programs that offer financial assistance for homeowners.
However, we realize that life happens and sometimes this is just not possible.
Why “Letting the House Go” in Foreclosure Isn’t the Better Solution
When you find yourself in a position where you must make a choice between the two, you may assume that a short sale takes too much time and costs too much.
While short sales often sell for more, they also come with a number of expenses.
Short sales resemble a traditional sale in the sense that you will need a realtor. Realtors take a substantial commission.
Arguably even more costly, a short sale requires time. Your realtor will stage the house, list the house, and see potential buyers until they finally make the sale. You still owe the mortgage payment during this time.
The “easier” solution can appear to simply let the house go back to the bank through foreclosure.
Foreclosure sales don’t require a real estate agent and don’t require renovations or staging, allowing them to process much faster.
However, most homeowners don’t realize the emotional toll and financial burden that will follow them long after they walk away from a property. You don’t have to accept either of these bad options. A better 3rd option exists that many Little Rock families have taken advantage of.
Avoid a Short Sale and Foreclosure with Gary Buys Houses
We at Gary Buys Houses work hard to provide you with the best solution possible when you need to sell your house as is in Little Rock, AR, even if you’re behind on payments and nearing foreclosure. We buy houses under these circumstances all the time and can help you navigate the process.
We can make an immediate offer on your home, regardless of poor condition, and also close extremely fast. This will help you avoid realtor fees, closing costs, and of course the entire foreclosure process. It will also help preserve your credit rating.
We’ve been in business here in Little Rock since 2010 and have established ourselves as a reliable buyer that not only has a passion for creating real estate solutions, but also the homes inside the houses. (This means serving people.)
We will give you a cash offer in no more than 48 hours (faster if you request a quote by phone). If you accept the offer, we can finalize the sale in as little as 7 days.
Don’t let those missed mortgage payments and late fees pile up. Avoid the selling costs and time it takes by attempting a short sale. Let us help you find a fresh start.
Ready to sell your house without an agent, short sale, or foreclosure? Contact us at 501-449-2897 today.
