A homeowner owes more on the mortgage than the property can sell for, and the lender agrees to accept less than the full balance. That transaction is a short sale. It allows the owner to sell and the lender to avoid a longer foreclosure process.

Short sales require lender approval, which can take months. Buyers face uncertainty and longer timelines. Sellers must document financial hardship and provide extensive paperwork. Junior lienholders may also need to consent.

The deficiency—the difference between the sale proceeds and the debt—may be forgiven, pursued, or reported as taxable income depending on circumstances and lender policy. Short sales appear on credit reports and affect future borrowing. For lenders, a completed short sale often recovers more than foreclosure once costs and delays are considered.

A short sale is a negotiated compromise when the math no longer works for a full payoff.