A short sale occurs when a homeowner sells their property for less than the outstanding mortgage balance, with the lender's approval to accept the reduced payoff. It is typically pursued as an alternative to foreclosure when the borrower is in financial distress.
Lenders must formally approve the transaction before closing, which can significantly extend the timeline compared to a conventional sale. The lender may also negotiate whether any remaining deficiency balance is forgiven or pursued after closing — a critical detail for sellers to clarify upfront.
For buyers, short sales can offer below-market pricing but require patience and flexibility. Appraisers and valuation professionals should account for distressed-sale conditions when considering short sales as comparable transactions, as they may not reflect true market value. Loan originators should be aware that short sale history on a borrower's credit profile can affect future financing eligibility, with mandatory waiting periods varying by loan type.