Smurfs aside :>) , a short sale does indeed occur when the mortgage holder lets a homeowner sell a home for less than the full mortgage amount. Generally the home seller must prove that the financial burden of owning the home has become a problem. The bank will want to see pay stubs, tax returns, and other documentation. On some occasions, the mortgage holder will take the proceeds of the short sale as payment in full. However, lenders do sometimes require that all or some of the "deficiency" be repaid by the seller through an unsecured loan. A short sale does damage the home seller's credit score. Obtaining another mortgage loan will probably be out of the question for several years.
Lenders often agree to short sales because they cost the lender less than foreclosing.
Prudential Real Estate of the Rockies