A short sale is sometimes indicated when a homeowner is in danger of falling into foreclosure. The mortgage lender will agree to lower the price of the balance of the loan in which the homeowner sells the mortgaged property at the discounted price. The debtor then will turn all the proceeds from the sale over to the lender in exchange for satisfaction of the debt. Typically the homeowner will have to prove financial hardship with the mortgage lenders Loss Mitigation Department. Hardships such as unemployment, medical issues, divorce or bankruptcy qualify as economic circumstances that could prompt a short sale. Banks do not want to take over homes, especially in a declining real estate market. They are well aware that it could end up costing thousands of dollars to maintain and refurbish the home with no guarantee of recouping the same amount of money they could with a short sale.

There are pros and cons to short sales. The obvious pro to a short sale is keeping the home out of foreclosure, although a short sale will still show up on the debtor's credit report, it will show as a pre-foreclosure redemption instead of a debt discharged due to foreclosure. In some instances the I.R.S. could consider debt relief as taxable income and has the right to issue a 1099 to the debtor for the difference.