A Short Sale is the result of an upside down mortgage or a second mortgage that won't clear the amount owed.
This typically happens when a seller owes more on their mortgage than they can sell the house for. This is where that term "upside down mortgage" on a mortgage comes from.
During the real estate bust a few years ago, this was a very common problem. It happened for several reasons:
The most difficult short sale to get approved is when the homeowner borrowed against the equity they had, at one time, on their house. This was usually done through a different mortgage company and they would put a secondary lien against the Title to the house. All was good until the house bust. Suddenly, people couldn't raise enough equity in their house to sell it.
At that point they are either forced to stay and keep making payments (hopefully) or try to sell their house and get a "forgiveness" on the total amount owed.
In the beginning, the secondary mortgage holders were being shorted thousands of dollars at settlements because they were allowing the sales to go through. They knew the first lien holder was losing so they would lose also.
After the real estate bust became very public and companies were getting in trouble, the secondary mortgage holders stopped just "shorting" themselves. Suddenly, the secondary holder was in the drivers seat on a sale of a "short sale" deal.
As you can imagine, they started saying "NO" to allowing these sales to go through. In the mid 2000's that became a very sensitive issue with Buyers and Sellers. Nobody would budge on the "Short Sale" side. The house could only get "so much" as a selling price, but the owner owed too much to both primary and secondary mortgage holders. Many a sale literally fell apart and the house would then wind up going into foreclosure and everyone - including the mortgage holders - would lose!!!
Seems no one in a company wanted to be the one to sign off on allowing a "short proceeds sale". Mortgage jobs were literally vaporizing and everyone who had a job wouldn't sign anything that might jeopardize their own job.
These Sales became a nightmare for everyone. And, everyone lost.
Moral of the story - if you are interested in purchasing a house that requires more than a primary bank allowing forgiveness on the amount owed, do NOT stop looking for a house.
This particular house may come through for you - but, don't hold your breath!