What is the difference between a 'short sale' and a 'foreclosure'?

this is a great question that seems so simple, but really is difficult to answer in few words because so many people (some who really should know better) don't use them correctly!

A SHORT SALE is a property marketed for sale where the funds expected to be realized by the sale will be insufficient to pay for the mortgage(s) secured by the home and the seller is not in a financial position to make up the difference. The sellers, therefore, intend to enter into a negotiation with their lender(s) to forgive a portion of their loan(s). As property cannot be transferred without the full release of liens, the approval of the homeowners' lien-holders (3rd Party Approval) to accept the writing-off of the loan(s) must be a condition of the Contract For Purchase and Sale.

A FORECLOSURE is a property that has been legally repossessed through the court system's foreclosure process by one of the former owners' lien holders after the owners' failure to pay their mortgage.

Unfortunately, while these terms should be stand-alone definitions, there can be some confusing usage of the term foreclosure as a property that is "IN FORECLOSURE" is one where a lien-holder has filed a case in court (referred to as under Lis Pendens) to begin the foreclosure process. There are two stages to being In Foreclosure: the Lis Pendens being filed and the the case is waiting for the assignment of its court date (still around 18 months from filing date), and then later of having a Judgement Date assigned.

Many folks refer to REOs as Foreclosures, but realistically they should be called Bank-Owned, as some REOs have become bank-owned properties through processes other than foreclosure such as "Deed in Lieu" where an owner cedes the property back to their lending bank rather than going through the court process.

So, if you're asking about what is the difference in the kind of sale a Short Sale will be vs. a Foreclosure, there's actually a spectrum answers as there are at least three different kind of Short Sales:
1. Simple Short Sale
The property will not be sufficient to pay for its mortgage and the seller will be negotiating forgiveness of part of their loan.
2. Short Sale In Foreclosure
The foreclosure has been filed in court. Buyers must pay close attention to the timing of the filing and if the judgement date has been assigned as the foreclosure process runs concurrently with the short sale negotiation process, and if the sellers' negotiator hasn't managed to get a judgement date postponed or suspended, the home could be foreclosed on while the short sale is being negotiated.
3. Short Sale with Multiple Mortgages (or other primary liens) to be negotiated.
Even more complicated, because even though mortgages are placed in order of priority (First Mortgage, Second Mortgage, etc.) each mortgage must be individually negotiated, the terms of each negotiated settlement disclosed to the other lien-holder and each negotiation must be approved within the same time frame.

The type of mortgage to be negotiated can affect the timing of closing as well. Any FHA loan will have an insurer who will be making up the difference of the loan to the bank, so there will also be negotiation with the insurer as well.

The timeline for closing the sale of these different kinds of properties varies greatly. REOs can close in as little as 15 days for a cash sale. Short Sales can take at least 6 months, or more, or never close, though there are new Federal Guidelines which may reduce this timeline. Unfortunately, these guidelines are so new, we are not able to see if they've actually begun to have an effect!

These is no simple answer to your question, as you can see, because each listing really is unique, so really you're best bet is to learn about each listing individually from a Realtor you can trust.