A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan. In a short sale, the bank or mortgage lender agrees to discount a loan balance because of an economic or financial hardship on the part of the borrower. 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.

Foreclosures begin with the Trustor (borrower) not making the monthly payments to the Beneficiary (Lender), the first missed payment is technical default, but in practical terms, most Beneficiaries do not begin the process until the third payment is missed. If the Beneficiary cannot resolve the defaulted payment amount with the Trustor through Forbearance or other Loss Mitigation measures, the Beneficiary will instruct the Trustee to begin Foreclosure proceedings, started by filing a Notice of Default with the County.

By not taking action you run the risk of having your house sold at auction in a Trustee Sale. Many people think their problems would be solved if they just let the bank take their house in this way. In most cases this is not true.

By doing a short sale, your negotiator can negotiate away any personal liens that the lender may want to come after you with. In the state of California, lenders cannot attach a note to a former homeowner for a purchase money loan. But, if you ever refinanced or have a second trust deed, these loans are not covered by the law. This practice by the banks is one of the main reasons to get your house sold as a short sale instead. It allows you to really start clean without notes being attached to future earnings.

Another good reason to do a short sale is to save your credit. You may think that if you've not been paying your mortgage for several months there's not much else you can do wrong to your credit. Although your credit may be drastically impaired in the short term, having your house foreclosed on will stay with you for 5-7 years, as opposed to a short sale that could be a non credit issue in a much shorter time. Here is a downloadable PDF from Fannie Mae of the probably repercussions of foreclosure, NOD and short sale: CREDIT AFTER FORECLOSURE OR SHORT SALE.