What is a short sale?

A short sale is defined as a sale of a property for less than the amount owed on the mortgage, with lender approval being a critical component of the process. In a short sale scenario, the homeowner is unable to meet the mortgage obligations and seeks to sell the property to avoid foreclosure. The lender agrees to accept less than the outstanding balance as the payoff in order to facilitate the sale and minimize potential loss on their investment.

This arrangement benefits both parties. For the homeowner, it provides an opportunity to avoid the damaging effects of a foreclosure on their credit score and allows them to move on without the burden of an unaffordable mortgage. For the lender, it is often a preferable option compared to foreclosing on a property, which can be costly and time-consuming.

The distinction between the other options lies in the terms of the sale. Selling a property for the full amount owed or for more than that amount does not qualify as a short sale, as it does not involve the lender's acceptance of a reduced payoff. While a sale before foreclosure can be a separate situation, it does not inherently define a short sale unless the sale price is below what is owed.