It is a sale of a home for less than the balance owed against it, which can close only because the lienholder agrees in writing to release its lien and accept the proceeds as payoff, and that written approval is the whole difference from an ordinary sale.
Short describes the money, not the speed, and not the price. The sale comes up short of the payoff. Everything else about it looks like a normal listing: an owner who still owns the home, an agent, a sign in the yard, a buyer who writes an offer, an escrow. What is added is a party who is not on the contract and did not want to be in this position, and who has to consent to being paid less than it is owed before anyone can sign a deed.
So the interesting question is never what a short sale is. It is who has to say yes, what they are weighing, and what happens to the money that is still owed after the closing.
What is short, and against what
The comparison is not price against loan balance. It is net proceeds against payoff, and both numbers are bigger than people assume.
The payoff is the principal plus interest accrued and unpaid, plus advances the servicer made on the owner's behalf for property taxes and hazard insurance, plus late fees and the costs of the collection so far. In Nevada the statute that governs deficiency actions defines indebtedness the same way at NRS 40.451: principal, accrued interest, the costs and fees of the sale, and advances made with respect to the property.
The proceeds are the price minus the cost of selling: the commissions, escrow and title charges, transfer tax, the recording, unpaid property taxes and any delinquent association assessments that have to be cleared to deliver title. A home priced at what it is worth can still come up short by a five-figure sum once that list is subtracted, which is why an owner can be shocked to hear the word applied to their house.
It is a normal sale with one extra approval
The order is the part people get wrong. The seller lists, receives offers and signs a contract first. Only then does the file go to the servicer's loss mitigation department, because until there is a signed contract there is nothing to approve.
The package that goes with it commonly includes a hardship letter, recent pay stubs and bank statements, tax returns, a monthly budget, an authorization letting the agent speak to the servicer, the listing agreement, the signed contract, and an estimated settlement statement showing exactly what the lender would net. The servicer then orders its own valuation, normally a broker price opinion or an appraisal, because it is not going to take the buyer's word or the agent's for what the home is worth.
What comes back, if it comes back, is an approval letter. It names the buyer and the price, states the minimum the lender must net, sets a closing deadline, and attaches conditions: an arm's length affidavit, a cap on the commission, a limit on what may be paid to junior lienholders. It also expires. Nothing before that letter is an approval, whatever anyone says on the phone.
Every lien has to say yes, not just the first
A short sale delivers clear title or it does not close, and every recorded interest against the property is in the way of that: a second mortgage, a home equity line, an association assessment lien, a judgment lien, a state or federal tax lien, a contractor's lien.
Each holder has to agree to release for less than it is owed. The first lienholder normally permits only a capped amount out of its proceeds to go to a junior, which sets up the standoff that kills a large share of these files: the second wants more than the first will allow, and one of them has to move. Any single holder can refuse and end the sale by doing nothing at all.
What happens to the money still owed
The gap between the payoff and the proceeds does not disappear at the closing table by itself. Releasing a lien and forgiving a debt are two different acts, and an approval letter can do the first without doing the second. The sentence that matters is the one saying whether the lender waives its right to collect the balance, and the amount it is waiving.
State law is the other half. Nevada addresses the short sale directly at NRS 40.458: where the creditor is a banking or other financial institution, a court may not award a deficiency judgment if the property is a single-family dwelling the debtor owned at the time of the sale, the loan was used to purchase it, the debtor occupied it continuously as a principal residence, the parties agreed to sell to a third party for less than the debt, and the agreement either does not authorize recovery of the balance or carries a conspicuous waiver statement signed by the institution and the debtor setting out the amount waived. Five conditions, all of them, and the last one is a drafting detail in a document somebody has to read.
Forgiven debt can also have a tax character, which turns on federal rules that have moved several times. This page is not tax or legal advice and does not tell anyone what their letter means. It says which document the answer is in.
Questions people ask
Does the seller get any money out of a short sale?
Normally none. The lender is already accepting less than it is owed, so the proceeds go to the payoff and to the costs of the sale. Some servicers and federal programs pay relocation assistance to a seller who cooperates and leaves the home in good order, and the approval letter states it if so.
Who pays the real estate commission in a short sale?
It comes out of the sale proceeds like any other listing, which means the lender is effectively paying it and normally caps it in the approval letter. Neither the seller nor the buyer writes a separate check for it, and a cap set below what the listing agreement promised has to be sorted out before closing.
Can you do a short sale if you are current on the mortgage?
Sometimes. Missed payments are not a legal requirement, they are a servicer policy, and many servicers will review a file on documented imminent default: a job loss, a medical event, a divorce, orders to relocate. What every servicer wants is a hardship it can put in a file, not simply an owner who would rather not be underwater.