'Short Sale' is explained in detail and with examples in the Real Estate edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Short sales are real estate sales where the money received from the sale is not sufficient to cover the balance that is owed on the property loan. This commonly happens as a result of borrowers being unable to keep up with the mortgage payments for their home loan. In this case, the bank or other lending institution will likely determine that it is in their best interest to take a reasonable loss on the sale of the property instead of pressuring the borrower to make the payments that he or she can not afford.
Both parties come together and agree on the short sale process, since it permits them both to stay out of foreclosure. Foreclosure is a negative outcome for the two parties, as it lowers credit scores of borrowers and costs banks in expensive fees. Borrowers must be careful, since a short sale agreement does not always absolve the borrower from having to cover the additional balance left on the loan. This remaining balance is called the deficiency.
The process of a short sale starts with the two parties concurring on a short sale being the best option to resolve a mortgage that the borrower is unable to keep up with as a result of financial or economic difficulties. The home owner actually sells the house in question for an amount that he or she is able to realize, even though it is less than the remaining loan balance. They give the money to the bank or lender. This is really the most economical answer for the problem in this scenario, since short sales are less costly and quicker than foreclosures that damage both lender and borrower.
Banks commonly employ loss mitigation departments. Their job is to contemplate the short sales that are possible or likely. Most of them work with criteria that they have set up in advance. In the difficult days following the financial crisis of 2007-2010, they have become more flexible and willing to entertain offers from borrowers. The banks will usually decide on how much equity is in the house by ascertaining the likely selling price that they will be able to receive either through a Broker Price Opinion, appraisal, or Broker Opinion of Value.
Even when Notice of Defaults have been sent out to borrowers beginning a foreclosure process, many banks will still consent to short sale requests and offers. They have become more understanding and accepting of short sales in the wake of the financial crisis than they ever were before. This means that for the countless borrowers who own houses on which they owe more than they are worth and who can not sell them, there is a better option open to them than foreclosure.