A lender agrees that a seller who owes $400k on a mortgage that is in default may list the property at $350k, which is the current market value of the property. This type of transaction is known as a:

• A. Foreclosure sale
• B. Deed-in-lieu
• C. Auction sale
• D. Short sale

Answer: (D)

This scenario shows a short sale. A short sale happens when a borrower owes more on a mortgage than the property’s current value and the lender agrees to accept a sale price that is less than the outstanding loan balance to release the lien. Here, the loan balance is 400k, the market value is 350k, and the lender agrees the property can be listed at 350k. By approving a sale at the market value rather than pursuing foreclosure, the lender minimizes costs and time and prevents the lengthy foreclosure process. The sale proceeds go to the lender to satisfy as much of the debt as possible, and any remaining deficiency may be forgiven or addressed by agreement, depending on the lender and jurisdiction. This differs from a foreclosure sale (lender-initiated sale after default), a deed-in-lieu (transfer of title to the lender in full satisfaction of the debt), or an auction sale (often part of a foreclosure process).