The world of mortgages can be highly complex, but most people can easily understand the basic concept of how real estate lending works. You borrow a sum of money from a lender. The bank places a lien on your house. When you sell your house, you pay the lien off. But what if you can’t sell the home for enough to pay the loan back?

A short sale means you don’t pay the lender in full

In certain circumstances, the mortgage lender will accept less than full payment. And although the process isn’t easy, lenders are often willing to do so when a house is financially under water.

An “underwater” house is one where its liens exceed its value. Even when a mortgage balance is less than a home’s worth, it may be under water after factoring seller closing costs.

How short sales get approved

The process involves convincing a lender to accept less than full payment. Lenders take a short payoff if they believe that there is a risk of getting less if they had to foreclose, which is the legal process for enforcing their lien after nonpayment.

In almost all cases, a borrower must be in default before a lender can consider a short sale. But there are exceptions. For a bank, the short sale process involves weighing risks. If you’re paying every month, the bank has little incentive to accept less than a full payoff.

Short sales can come with risks

Although there is one significant benefit to a short sale — you can shave thousands off your debt — there are several risks to weigh. First, the application process can take a while and a bank usually won’t pump the brakes on legal proceedings. Second, any forgiven portion of the mortgage is considered to be income for tax purposes.

If you are in default and cannot sell your home for a price that’ll satisfy your mortgage, a short sale may be an option.