I am going out on a limb here - please remember I am not licensed in your state and I don't have a clue about those rules. I assume you have an agent? Let them guide you. But, in Virginia - here's how it would work....
If your contract was contingent on "third party approval" (meaning your bank needs to approve the sale) and assuming your bank has not yet approved the sale; then, call them. Explain your situation. Get a deal worked with them that includes rejecting the short sale request. That should get you out of hot water with your contract.
Dot your legal i's and cross the t's before hand, but I also agree honesty is the best policy. Your decision not to sell clearly is not a reflection of your buyer, and I am sure that you wish them no harm. Once you have a plan in place, have your agent explain the situation to their agent (again, making sure this puts you at no legal risk), and wish them the best. A fruit basket couldn't hurt - for the agent and the buyers, and oh, yeah, don't forget your agent who's busted her hump for 10 months - find her lots of referrals.
Congrats! I wish we had more of these problems to solve.