A Foreclosure is when the lien holder (generally the bank) files legal documents to take possession of the property because the homeowner defaulted on their payment obligation. The process takes time and is costly for the lien holder, and therefore the bank’s last and least favorable remedy.
A Short Sale involves a lienholder willing to approve a sale even though the proceeds of the sale will not be enough to pay off the balance owed to the lien holder.
Banks will often prefer a Short Sale, where the bank (or lienholder) will accept less than the balance owed in order to avoid having to foreclose on the property.
The property owner will need to qualify for the Short Sale approval, by showing evidence of true financial hardship that makes it difficult to continue with the payment obligation for the property (job loss, income loss, etc.), and does not have the funds to make up the shortfall for the amount owed.
The lienholder typically orders an appraisal to determine the true market value and carefully scrutinizes the property owner’s financial hardship before approving the short sale.