In short, a short sale occurs when the Seller owes more than the home is worth when sold.
A short sale is a sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property, and the property owner cannot afford to repay the liens' full amounts, and whereby the lien holders agree to release their lien on the real estate and accept less than the amount owed on the debt.
To help understand how a short sale would relate to, or differ from, a foreclosure, it may be helpful to point out that short sales can also be referred to as “pre-foreclosure sales” which, as the name implies, precedes the home being officially repossessed or foreclosed on by the lender. That is, the property is sold much earlier than the months it typically takes to reach foreclosure, allowing all parties to move on from the transaction sooner.
It should be noted that there are still negative ramifications for short sales, even if less damaging than those associated with foreclosure and/or bankruptcy. Yes, you do forfeit the home either way but the outcome for you down the road – whether you let your lender come and take your house, or whether you take charge, sell the home, and settle your debts yourself – will make a difference in your life for years to come.