It's when a house sells for an amount "short" of the mortgage. It has to be approved by the bank that "owns" the mortgage, That often takes time to get answers. This is because mortgages were bundled together, "pooled" with other mortgages and sold as bonds, or "Mortgage Backed Securities", or an "MBS"; The buyers of these bonds bought pieces of them called "Tranches". Those Tranches are "horizontal" slices or even "vertical" slices. When those individual mortgages go bad, they affect the MBS, and their slices that were sold off. One mortgage might involve one original MBS, but be involved in many tranches, (Synthetic MBS), as well as CDOs which are in fact insurance on tranches, or bets that they would perform or default. Derivatives.
1- Most mortgages that are eligible for being sold short are "underwater".
2- Underwater mortgages are more than the house's current market value.
3- The contact between the homeowner and the mortgage is often a bank, but only the "servicer" of the loan, not the owner.
3- The actual owner of the mortgage is not always a bank but an "investor" and;
a- an "Investor" is sometimes a fund owned by as many as thousands of people
b- an "Investor" is sometimes a fund that owns only a "section", or "slice" or "tranche"
c- there were different rules on how to treat an individual loan or tranche in each bond.
d- Some individual investors get paid better if the loan is foreclosed than if it's sold short of the mortgage or if it's "modified" (lowered for the homeowner or seller to be made more affordable by just lowering the payments, reducing principal, or a combination). Many lawsuits, arguments.
In "Short", if the house is overfinanced and is defaulting, it will start investors arguing and litigating. There are many solutions being offered to make a short sale happen, but rarely will everyone win, and the people and investors that will be taking the losses, object enough to stall and delay the whole process, sometimes for a very long time. A Real Estate Broker has to know how to wade through this process for their client and for their customer. Because each situation is different, it's caused a significant "dislocation" in the marketplace for years, and maybe for many more years.
A pre-approved short sale or an REO, (a finished foreclosure) suggests this process is cleared up already, but it depends on who "pre-approves" it. As an "homebuyer" investor, I have found significant value outside short sales and foreclosures. This is because distress sales lowering the prices in the marketplace. Everyone is different...best of luck in all your adventures.