In a proposed short sale, the owner will first have to prove to the lender that he or she is no longer able to make the mortgage payments.  To be considered a successfully executed short sale, a lender must agree to accept a specified reduced mortgage amount as payment in full and escrow must close in order for title to be transferred.  Otherwise, the term "short sale" refers to the process only.

It's important to know that short sales are not necessarily in any stage of foreclosure. However, some lenders are not open to the idea of a short sale unless the borrower is already in preforeclosure.

By accepting a short sale, the lender might avoid a lengthy and more costly foreclosure, and the borrower is able to pay off the loan for less than what he owes.  However, the borrower might not escape all liability.

The borrower still faces tax consequences because the IRS allows the lender to issue the borrower a Form 1099-C declaring the forgiven portion of the mortgage as income.  There are several bills before Congress to deal with the burden on the forgiven borrower's debt based on the government's overall desire to reduce the impact of the subprime crisis.