A lot of people are confused about what exactly a short sale is and whether or not a home has to be in foreclosure in order to have a short sale.

Quick answer is that you don't necessarily have to be in foreclosure to have a short sale - if you owe more than you can get for your house, regardless of whether or not you are current on your mortgage, you are short. 

Boston.com explains the situation pretty clearly.  Be sure to check out the reader comments too - there is valuable insight there as well.

Short sales and foreclosure explained