What is a 'short sale' in the context of real estate?

A 'short sale' in real estate refers to a transaction in which a property is sold for less than the amount owed on the mortgage, and this sale requires the approval of the lender. This situation typically arises when the homeowner is facing financial difficulties and can no longer keep up with mortgage payments. To avoid foreclosure, they may seek to sell the property at a price lower than their remaining mortgage balance. The lender agrees to this arrangement because it allows them to recover some of the owed amount and avoid the more costly and lengthy process of foreclosure.

For a sale to be classified as a short sale, it is essential that the lender agrees to accept the lower sale price, as they must formally approve the transaction. This factor distinguishes a short sale from other types of real estate transactions where the sale price is unaffected by the lender's consent or the homeowner's financial situation.