A short sale allows a borrower to sell mortgaged property for potentially less than what remains on the mortgage. It is an alternative to a regular mortgage, which allows lenders to repossess property as security on a mortgage.
To the extent that the proceeds of a short sale are less than what satisfies the mortgage, the borrower may be liable to pay the difference. That distinction depends on whether the property is in a recourse or non-recourse state. Short sales can negatively affect a borrower’s credit rating by having the debt declared as not paid as agreed, and it has the same effect as a foreclosure. In some circumstances, borrowers can negotiate with their lender to report the debt as paid in full, in which case the negative impact on the borrower's credit rating is minimal.