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A homeowner is 'short' when a borrower owes an amount on his property that when combined with closing costs and commission is higher that the current market value of the home.
A Short Sale happens when a negotiation is entered into with the homeowner's mortgage company or companies to accept less than the full balance of the loan or loans at closing. The buyer closes on the property and the property is 'sold short'.
What a Short Sale is Not!
A short sale is not a way to just get out of a mortgage: it is a tool for a borrower to use when they truly can't pay their mortgage.
The Seller must have a valid financial hardship for why they can not pay their mortgage. A Seller must not be able to pay down his Mortgage. The Seller must be financially insolvent. For the purposes of a short sale this means that he has to owe more than he has or that the seller does not have liquid cash or assets that could be used to buy-down their mortgage to pay off their loan or loans.