In a short sale, the lender agrees to reduce a loan balance due to an economic or financial hardship on the part of the owner. This negotiation is all done through communication with a bank's loss mitigation department. The home owner/debtor sells the mortgaged property for less than the outstanding balance of the loan, and turns over the proceeds of the sale to the lender. In such instances, the lender would have the right to approve or disapprove of a proposed sale.

A short sale typically is executed to prevent a home foreclosure. Often a bank will allow a short sale if they believe that it will result in a smaller financial loss than foreclosing as there are carrying costs that are associated with a foreclosure. For the home owner, advantages include avoidance of a foreclosure on their credit history and partial control of the monetary deficiency. A short sale is typically faster and less expensive than a foreclosure.

• Negotiations

Lenders have a varying tolerance for short sales and mitigated losses. The majority of lenders have a pre-determined criteria for such transactions. Other distressed lenders may allow any reasonable offer subject to a loss mitigator's approval. Multiple levels of approvals and conditions are very common with short sales. The wide array of parties, parameters and processes involved in a short sale makes it a relatively complex and highly specialized type of real estate transaction which is why unfortunately short sale deals have a high failure rate and often do not close on time to save homeowners from foreclosure when they are not handled by a knowledgeable and experienced professional.

One thing a buyer should know about a short sale is there is no necessary commitment by the bank to sell the house.

Any short sale contract includes a contingency where the bank must approve the sale. If the bank persuades the seller to refinance the house, the bank doesn't approve the short sale and the buyer gets their deposit back. In this situation the bank has tied up several months of the buyers time and now the buyer must start the buying process over again. So if you have a fixed time period to get in a specific city or neighborhood you may be better off with a foreclosure (the bank formally took possession of the property) or a situation where the seller has equity.

• Credit Reporting

A short sale does adversely affect a person's credit report, though the negative impact is typically less than a foreclosure.Depending upon other credit information it is typically possible to obtain another mortgage 1-3 years after a short sale.