A short sale is a bit contrary to what it may sound to be. In fact, a Short Sale will typically take double or triple the time to close as a conventional sale of a home. To answer your question however, a Short Sale is an option a home owner would choose in lieu of having the bank foreclose on the property. A Short Sale usually begins by the home owner facing a loss of income that makes it difficult for them to keep up with the mortgage payments. In turn, the bank may offer a few solutions such as a forbearance (temporary suspension or reduction in payments) or a Loan Modification (their current interest rate may be lowered with an adjusted monthly payment). These options sometimes still fail to get the home owner at a comfortable monthly payment to where they are able to afford the mortgage and many times they breach the terms of the modification by sending payments late or not at all. Having no other solutions, they decide to contact a Realtor to try and sell the home in order to at least try and recoup some of their equity or at least break even and owe the bank nothing. Unfortunately with the market downturn, what many home owners find out is their property's market value is less than the payoff amount of their mortgage.
That's when the Realtor wisely suggests the home owner consider a Short Sale as an option to the homeowner to avoid foreclosure.

The gaining popularity of these types of sales was introduced in 2007 with the enactment of "The Mortgage Forgiveness Debt Relief Act" or HR3648
You can view the actual wording of this bill online via the Library of Congress website.
http://thomas.loc.gov/cgi-bin/bdquery/z?d110:h3648
You can also view more about it via the IRS website.
http://www.irs.gov/individuals/article/0,,id=179414,00.html
In short, when home owners made any modifications on their loans that resulted in a loss to the bank or the home was foreclosed, the reality was that it would reflect as actual income to the home owner in the form of a 1099 making the home owner's tax liability quite a bit higher than what they actually earned from wages. The bill resolved that under many situations, this debt could be forgiven and the home owner/taxpayer would simply submit form 982 with their taxes to take advantage of this much needed bill.

So if "The Mortgage Forgiveness Debt Relief Act" forgives the debt whether the bank forecloses or the property is a Short Sale, why not just let the bank foreclose?
While a foreclosure and a short sale may in fact impact your credit score the same, the reality is that a Short Sale will almost always return a higher net to the the lender than a foreclosure (if you can get the bank to accept the Short Sale). This is important to mention because the home owner who does a Short Sale may be eligible to buy another home with an institutional loan backed by Fannie Mae or Freddie Mac much more quickly than a homeowner who allowed the bank to foreclose.

If you or anyone you know is thinking foreclosure is their only option, please make sure to contact us first. We have a great deal of experience in helping home owners avoid the stigma of foreclosures on their credit & they will never pay a commission or fee for our services.

Robert Regan, Realtor ®
R. K. Regan Team
Rob@RKRegan.com
214-586-7224 (Office) http://www.RKRegan.com
HUD Registered & Approved Agent

A short sale is where the home owner owes more money to their bank than what the home will bring on the market. The owner must get permission from the lender to sell the home for less than the note they hold, and banks don't want to consider it unless the owner is delinquent (you can still ask). The home is listed and when an offer comes in, even though the seller and the buyer may agree, the bank must also approve of the terms. The bank also will decide if they will release the home owner from the difference between what the home owner owes and what the home nets to the bank. Someone in this situation may want to consult an accountant to see how the difference in $$ may affect their taxes. Hope this helps.