A mortgage short sale occurs when a borrower and a lender settle for less than is owed on a mortgage because changes to the housing market or financial status has made it impossible to continue the arrangement. Lenders would rather take what they can get, while they still can, in this sort of situation.

An example of a short sale would be an older couple reaching retirement age with a house that is bigger than they need in a neighborhood that has seen the property values decrease, and due to pension cuts they will have hard time affording the house in retirement. The lender would settle short to avoid having to go through a foreclosure and all that it implies.

Short selling in stocks and other securities is completely different than a mortgage short sale. In a short sale mortgage settlement, the lender would take less than the value of the loan, when it was obvious that a better deal would be hard to come by in the current environment, given that the borrower is unable to sustain the payments.

Other options include a forbearance, in which the borrower is allowed to take a break from paying during a time of financial distress, or a mortgage modification plan that changes the payment schedule to be more accommodating for the borrower.

What is Short Selling?
What is Mortgage Modification?
What is a Mortgage Forbearance Agreement?