A short sale is what happens when the person selling the home is selling because they cannot afford to pay their mortgage. In a short sale, the holder of the mortgage (bank) agrees to allow the mortgage holder to sell the home for less than the debt owed, therefore the monies earned by the sale will fall short of what is owed to the bank. The reason many mortgage lenders agree to a short sale is because they pay fewer fees and additional costs compared to simply foreclosing on a property.
A short sale is something no mortgage holder wants to face. No one wants to lose money when it comes time to sell their home. Everyone hopes to break even or turn a profit, particularly if they have invested in the home over time via upgrades, however a short sale is actually something the mortgage holder tries to negotiate a lender to agree to. The mortgage holder often has to prove financial inability to make the mortgage payments in order for a short sale to be granted by the lender. This inability to make payments must also be proven to anyone who has a lien against the property – this can include Homeowner Associations.
One note of significance for those considering short sale as a solution to their financial situation: a short will hit your credit score hard. You will likely have to wait a few years before you can consider purchasing another property that requires financing, and you will retain a history of that short sale, which will impact how lenders look at you in terms of risk.