Simply stated, a short sale is a program that allows you to sell your house for less than you owe across your mortgage(s) and other liens, and customary closing costs. Your mortgage company will allow you to sell your home for its market value and will forgive any remaining debt, no matter how big the difference between the balance of the mortgage(s) and the sales price may be.
For example:
Mortgage 1 Balance: $450,000
Mortgage 2 Balance: $50,000
Closing Costs (est.): $30,000
__________________________
Total Debt + Closing Costs: $530,000
Sales Price: $350,000
__________________________
Net: -$180,000* (You will NOT owe the this amount! The debt is forgiven)