Selling a home for less than the mortgage balance, with the lender agreeing to accept the shortfall. Used as an alternative to foreclosure when a homeowner can't pay and the home is underwater.
A short sale happens when a homeowner sells their home for less than they owe on the mortgage, with the lender's approval to accept the shortfall rather than foreclose. The seller "comes up short" — hence the name.
Short sales are typically pursued when: the homeowner can no longer afford the mortgage AND the home is worth less than the loan balance (underwater). The seller has to prove hardship and demonstrate they can't make payments. The lender reviews and approves (or denies) the proposed sale price.
Compared to foreclosure, a short sale is dramatically less damaging to the seller's credit — typically 100–150 points vs. 150–250 for foreclosure — and the wait to qualify for a new mortgage is usually shorter (2–4 years vs. 3–7). Short sales also take longer to negotiate, often 60–120 days from offer to closing.
Example
A homeowner owes $380K on a home now worth $320K (60K underwater) and can't make payments after a job loss. They list it as a short sale at $325K. After 90 days of negotiation, the lender agrees to accept $320K and waive the $60K shortfall. The seller's credit takes a hit but they avoid foreclosure.
Also known as
short sale, pre-foreclosure sale, hardship sale