A short sale occurs when the net proceeds from the sale of a home are not enough to cover the sellers’ mortgage obligations and closing costs, such as property taxes, transfer taxes, and the real estate practitioner’s commission. The seller is unwilling or unable to cover the difference.
Extenuating circumstances influence whether or not banks will discount a loan balance. These circumstances are usually related to the current real estate market climate and the individual borrower's financial situation.
A
short sale typically is executed to prevent a home
foreclosure. Often a bank will choose to allow a
short sale if they believe that it will result in a smaller financial loss than foreclosing. For the home owner, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency.
Additionally, a short sale is typically faster and less expensive than a foreclosure. In short, a short sale is nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount.
Creditors, their surrogates, and those who politically benefit from the mortgage industry -- especially those in the real-estate, mortgage servicing, and banking -- wrongly portray short sales as difficult to complete or morally questionable
[citation needed]. This is simply untrue if the value of the underlying asset, a home, has fallen dramatically and the debtor has limited assets. Short sales are extraordinarily common in standard business transactions in recognition that creditors are not doing debtors a favor but, rather, engaging in a business transaction when extending credit.
Some — although by no means all — short sellers may also be in default on their mortgage loans and be headed for foreclosure. However, home owners who bought at the top of the market or who took out large amounts of equity with a refinance and who now need to sell because of divorce or job transfer may also find themselves upside down, owing more than the home is currently worth when closing costs are factored in.
Information from
Wikipedia and
Realtor.org 
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