A Short Sale is a transaction where the proceeds from the sale fall short of the balance owed on a loan secured by the property sold. In short sales, the seller receives no cash since all of the proceeds go to pay off the debts against the house.

In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the debtor. This negotiation is done through communication with a lender’s loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. In such instances, the lender would have the right to approve or disapprove of a proposed sale. Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market and the borrower's financial situation.

A short sale is usually done to prevent foreclosure, but the decision to proceed with a short sale is predicated on the most economic way for the bank to recover the amount owed on the property. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing (due to the carrying costs and other risks associated with a foreclosure). A bank will typically determine the amount of equity by determining the probable selling price from a Broker Price Opinion (BPO) or through an appraisal. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed. It does not rid of the remaining balance unless the settlement is clearly indicated on the acceptance of the offer.