A short sale is a deal that can be arranged before the property goes into foreclosure, at a time when both the lender and the borrower agree that this kind of sale(one that generates proceeds that are less than are owed on the property)is preferable to a default on the mortgage.

This is an excellent question, and a lot of consumers don't know.

A short sale situation exists when the market value of the property fails to meet or exceed the encumberances (loan balance, delinquent taxes/assessments, other costs of sale). A reasonable buyer could not or would not overpay just to clear the seller's costs.

So the seller/seller's agent approach the lender and negotiate a sale where the lender agrees to accept less than what is owed as payoff for the debt.

This can be a great solution to the problem, as the property is 'usually' less thrashed and neglected than if it was foreclosed on, the ding to the property owner's credit is 'slightly' gentler. The con to short sales is, they can take a long time and many buyers get tired of waiting . . .

A foreclosure occurs when the borrower defaults on a loan, is given a certain amount of time to catch up (depending on where the property is) and if they do not, it is sold at auction. The lender usually assigns a dollar amount to the property which equals the amount of the debt plus costs to foreclose, which is called a 'credit bid' . . . if no one bids at or above that amount, the lender gets the property back (usually a 'trustee's deed'). 

Then they get to kick out the previous owner or tenants and clean up the mess and fix stuff and hopefully recoup some of their costs via bank-owned resale.

If an investor sees the property as feasible, and outbids the bank, they may fix and flip the property or fix and rent it out.

The difference between a short sale and a foreclosure:

1.  A Short Sale is a home "still owned by the seller" but the Seller owes more on the house than they can sell it for and so with the Bank's Permission ... the Bank agrees to take less.

2.  A Foreclosure is a sale of a home that has been taken back by the Bank and is now selling as a "Bank Owned Property".

You have some studying to do.

Nina Hollander gave a great answer and Alan May gave you great wisdom. I find short sales to be a major pain in the ass but I've completed several.

You've got the answer to your question.

All I will add is if anyone needs one done in Connecticut I've done over 200 short sales since the market turned in 2005. I have a perfect record of closing 100% of my short sales; regardless of complexity.  I am trusted by a variety of homeowners & agents to complete their short sales. 

Foreclosures are generally a result of the owners not paying their mortgage and the lender liquidating the home in hopes of getting some of their money back.

Short sales are for those owners who are upside down on their mortgage and negotiated with the lender for a lower than what is owed payoff in an effort to avoid foreclosure.

      Title (the deed) is still with the owner in a Short Sale.  In a Foreclosure, the Title to the property has passed to the mortgagee (bank or financial institution), and the property is now REO.

Great answer and response from Candice A. Donofrio - I couldn't have said it better myself!

They are both very long. 

You have some great answers here. 

Even my mother knows this one.

I like the responses from Nina, Candice and Roy.

Nina Hollander has your answer.

Nina Hollander and Candice A. Donofrio gave detailed answers.... 

Short sale is when the owner still owns the property and can sell the property. Although, the sale may need third party (lender) approval for the sale to occur. Also the owner needs to be behind on their payments and underwater on the property because the lender is going to take a loss on the sale as well. Otherwise, the owner would just receive less equity from the sale of the property or they could come to the closing with a check to make up ther difference in the loan payoff.

Foreclose is when the lender has taken the property through legal and court action. Now having REO on their books. 

Short sale: You still have title and can sell the home for less than you owe, with the bank's approval.  No impact to your credit score.

Foreclosure: You've lost the house to the bank, they've taken it back from you and will sell it.  Your credit will be dinged and you will have a foreclosure judgement against you.

Candice A. Donofrio You could write a few blogs from your excellent answers here...or maybe you already have.

Lots of good information from the AR community to this question.

One destroys (foreclosure) the owners credit the other preserves it (pre-foreclosure or what you are calling a short sale).

Short Sales are better and a Realtor can still get a listing out of them.

Candice A. Donofrio and Nina Hollander  gave you great answers but there are other things to consider

Will lender 1099 the Borrower for the forgiveness of debt? ( Borrower will owe income tax on forgiveness which is not cash in pocket, but tax owed next cycle)

Short sale softer on long-term credit- only hurts for 4 years on conventional while Foreclosure 7 years on conventional (less time on FHA and VA). 

Other concerns- these transactions are stressful on the owner and any agents as worry accumulates when you approach deadlines.  Taking this listing and trying to negotiate with a behemoth bank is no simple task. 

The owner must understand the timeline, be able to pack up and go AND find the landing place - Often a heartache for the owner to make the change

About 60 days.

The very short answer: a short is a negotiated foreclosure sold to a specific buyer. A foreclosure is neither.

Candice A. Donofrio provided an excellent answer.

The # of advil required  (sorry... simply couldn't resist). 

Thank you Candice A. Donofrio 

I think Nina Hollander and Candice A. Donofrio have the answer..

Sarah Hansen - can't beat the answer from Candice A. Donofrio.

You have many good answers here.

Sarah,

You have great answers from both Nina Hollander and Candice A. Donofrio . A

In both cases, you'll have to leave your home...... in both cases, you probably can not afford it any longer..... I'd say, you have  some control over a a short sale process negotiation and you work with an agent who negotiates on your behalf( hire the one who knows what she is doing!), also you can rebuild your credit sooner, vs you have no control over brutal foreclosure process by your lien holder. 

Foreclosure - bank owned

Short sale - bank approved but not owned.

Many short sales are not in foreclosure nor are they REO properties yet. It just could mean the seller cannot sell at a figure to payoff the debt.

To the seller who lost there is no difference neither is there to the buyers. Both come up short...

Nina has answered.

Perfect definitions to look up and get the proper legal descriptions rather than someone's opinions.

Both scew up the credit and when there was national legislation about debt foregiveness short sales were even better for the owner. It still can be best to work with the lender to avoid a full blown forclousre even with tax implications.

Short sale is selling and asking the bank to take less money than they are owed. Foreclosure is the bank taking the property due to non-payment of note and enforcing the mortgage lien.

Candice A. Donofrio nailed this one!

In short a foreclosure is a home taken back by the bank at foreclosure auction. A short sale is still owned by the owner who most often owes more than the home is worth. A complex process to get approval from their bank to allow the sale. 

A lot more aggravation with a SS

Some great short and long explanations here, so with my typing skills I  suggest you read those!

I see many explanations.

Short sales can happen before it goes in foreclosures

Short sale - owners could be living in the home, owe more than they can sell.

Foreclosure - owners have left, and the bank owns the home.