Definition
A short sale happens when a property sells for less than the mortgage balance and the lender agrees to forgive the difference. It's an alternative to foreclosure, though it still impacts credit. The process takes 3-6+ months due to lender negotiations.
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Short sales occur when property values decline and borrowers owe more than properties are worth (underwater mortgages). The sale is called 'short' because proceeds fall short of the debt. Short sales require lender approval and negotiation; lenders must agree to forgive the difference. Short sales are alternatives to foreclosure, allowing borrowers to avoid the foreclosure process and its consequences. However, short sales take 3-6 months or longer due to lender review processes. Short sales may impact credit less severely than foreclosure but still have credit consequences. Some borrowers may have tax liability on forgiven debt.
Pro Tip
Short sales are time-consuming and require lender approval; hire an experienced short sale agent to navigate the lender negotiation process.
Example
A home purchased for $400,000 is worth $300,000; the mortgage balance is $350,000. The owner sells for $300,000 and the lender agrees to accept this as full payoff, forgiving $50,000.