If the lender agrees to the short sale, the seller eliminates the mortgage debt without foreclosure or personal bankruptcy. The lender agrees to the short sale if the loss would be less than going through a foreclosure. The Joint Economic Committee estimates that a foreclosure costs the lender up to $50,000. A recent study found that a short sale resulted in an average loss of 19% of the loan amount, compared to 40% for foreclosures (Source: MSN, May 12, 2008).

However, short sales are not easy to complete. Typically, the seller puts the home up for sale and gets an offer on the property. The offer is then presented to the lender, who can take weeks or even months to make a decision. In most cases, the lender won't even consider the short sale unless the seller appears unable to make the mortgage payment. If the lender feels the seller can pay, there is no incentive to accept a loss on the property.

A short sale gets even more complicated when there is more than one loan against the home. In that situation, all lenders have to agree to the short sale. In many cases, the second lender will get an even smaller percentage of the loan, so that lender has even less incentive to accept the deal.