Definition
Selling a home for less than the mortgage balance, with the lender's approval, because the owner is underwater and cannot keep paying. The lender agrees to accept the sale proceeds and either forgives or negotiates the shortfall. (Shorting a stock is an unrelated concept: a bet that a share price will fall.)
Why it matters
For an underwater owner in trouble, a short sale usually damages credit less than a foreclosure and ends the debt on clearer terms. The catch is lender approval, which can take months, and possible tax on any forgiven balance.
Example
A homeowner owes $290,000 on a house now worth $250,000 and can no longer make payments after a job loss. The lender approves a $250,000 short sale and negotiates the $40,000 gap, and the owner avoids a foreclosure on their credit report.
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.