A short sale occurs when a seller owes more on his property than it is currently worth, does not have the necessary money to pay the difference and the bank agrees to accept less than the full amount of the mortgage.  In order to qualify for a short sale the home owner must also demonstrate financial hardship. 

A short sale is obviously not the ideal situation for a home owner or the bank for that matter.  No one wants to be in a situation where they are force to short sell their home but it is a much better option for both parties than a foreclosure.

One of the reasons why a short sale is such a bad event is the amount of damage it does to your credit report.  Not only will a short sale be listed on your credit report for several years this blemish can also lead to higher interest rates on future purchases further damaging your financial situation. 

Also, after a short sale it can be quite difficult trying to secure another mortgage.  Because you had to short sell your current property you will be seen as a high risk candidate for any future loans you seek as long as that short sale mark is on your credit report.

While short sales certainly are not the best thing in the world for your finances they are not all gloom and doom either.  They can actually be a nice alternative to their nasty cousin, the foreclosure.  A short sale is a great way to lessen the effects that a foreclosure can have on your credit report. 

While your credit history will still suffer it will not suffer as badly if your mortgage went into foreclosure.  Also, banks still receive some money when allowing a property to be approved for a short sale so it is in their best interest to not let someone foreclose on a home.

When someone owes more on his property than it is currently worth, cannot make the money mortgage payments while proving financial hardship and the bank agrees to accept less than the full amount of the loan then he may qualify as a short sale.  When all of these conditions are met a home owner has the opportunity to lessen the damage that a foreclosure would bring with a short sale allowing both parties to receive some benefits from the unfortunate financial situation at hand.

Moe Bedard
My name is Maurice "Moe" Bedard. I am the founder of America's #1 Mortgage Forum, LoanSafe.org. My online work has been featured in the New York Times, LA Times, Fox Business, and many other media publications.