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A short sale is a real estate sale where the owner/borrower sells at a price that is less than the amount they owe on the property, and the proceeds of the sale go to the lender. Typically, when the owner/borrower struggles to meet their mortgage payments and the lender agrees that selling at a moderate loss is a better option than foreclosure, a short sale is the solution. Both the owner/borrower and the lender must agree to a short sale.
A short sale is, then, a type of settlement. Whether or not the owner/borrower is responsible for the deficiency (the difference between the amount owed and the sale price) depends on the state wherein the property is located. In some states - called recourse states - the owner/borrower is liable for the deficiency. In non-recourse states, the owner/borrower is not responsible for the deficiency.
Short sales differ from foreclosures in fundamental ways. One of those is that a foreclosure is forced by the lender and the borrower need not agree to it. By comparison, a short sale must be agreed to by both the lender and borrower. There are also important differences in the impact of short sales and foreclosures on the borrower's credit scores. Generally, a short sale won't cause as much damage to the borrower's credit ratings as a foreclosure.
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