What defines a short sale in real estate?

A short sale in real estate is defined as a sale where the property is sold for less than the mortgage amount. This situation typically arises when the homeowner is unable to meet their mortgage obligations and wishes to avoid foreclosure. In a short sale, the lender agrees to accept less than the full amount owed on the mortgage, allowing the homeowner to sell the property and settle the debt for a lesser amount. This process often requires the lender's approval, as they need to assess whether it is more beneficial to allow a short sale rather than proceeding with a foreclosure.

Understanding this concept is crucial because it reflects the financial distress of the owner while presenting an alternative to foreclosure that can be less damaging to their credit score. The lender also benefits as a short sale can often be a quicker and less costly resolution compared to a foreclosure process.