A quick definition: Short sales are when the seller of a home that has dropped in value to less than what the seller owes on the mortgage finds a buyer willing to pay the current market value of the property, and they get the bank or lender's permission to accept the sale proceeds as a payoff of the mortgage.
But I won't be promoting the short sale option any more, at least not without some major caveats. I recently attended a continuing legal education seminar at which a group of lawyers who spend their every day working with distressed homeowners discussed the "dark side" of short sales. Here, in a plain-English nutshell, is what they described:
1) A short sale is not significantly better for your credit rating than a foreclosure.
2) Even though the lenders express willingness to cancel the lien on the property following the short sale, many have started sneaking difficult-to-understand language into the short sale contract allowing them to come after the home seller for the remainder of what was owed on the loan! (That's despite law in the state of California, at least, that seems not to allow such behavior -- but someone's going to have to sue to make this crystal clear).
3) Although common wisdom says that lenders never try to collect on these deficiencies, the experience of these attorneys is that they ALWAYS try to collect -- if not on their own, then by selling the debt to another entity that will try to collect.
My new caveats? Don't even consider a short sale without getting a look at the written documents from your lender and, even better, having them reviewed by an attorney who can discuss the comparative benefits of your various options.
Want to hear a more detailed explanation, straight from the source? I happened to mention this seminar to C.S. Soong of Against the Grain on KPFA radio, and he interviewed William Purdy, one of the lawyer-presenters. You can hear the interview here.