HOW DOES A SHORT SALE IMPACT YOUR CREDIT REPORT?

Although it’s considered better than a foreclosure, a short sale is still reported as a negative on a credit report. However, with the millions of homeowners now in some stage of pre-foreclosure, the stigma is lessening and the number of short sales is increasing.

The main advantage of completing a short sale is that you may be eligible to buy another home in as little as two years as opposed to having to wait as long as five years. These “rules” may change in part with time. In the eyes of a future lender, someone who stuck it out, to do the right thing and complete a short sale should be more worthy of their trust than someone who just walked away and let the home go into foreclosure.

Options to Foreclosure and their effects on credit
REPAYMENT PLAN
When you fall behind on the payments, you'll talk to the “loss mitigation” department. Their aim is to get you caught up, and the sooner the better. They will require at least a partial payment now with the balance of the payments over a period of time that they allow.
Effect of a successful repayment plan on your credit record: Minor to moderate, depending on how far you fell behind.

FORBEARANCE
The loan servicer might agree to suspend payments for a few months, until you get back on your feet financially. A forbearance isn't for an indefinite period; it might be for one or three or six months, and after that, you'll be expected to make full payments on time.
Effect of a successful forbearance on your credit record: Minimal to moderate, depending on the circumstances.

LOAN MODIFICATION
A loan modification is similar to a refinance: The lender agrees to alter the loan, but with few or no fees. The lender might reduce the interest rate, change the loan from an ARM to a fixed-rate mortgage, or raise the monthly payment by a few dollars so you pay off the entire loan, including the past-due amount, by the loan's original end date.
Effect of a modification on your credit record: Minimal to moderate, depending on how far behind you fell on your monthly payments.

DEED IN LIEU OF FORECLOSURE
This option often is referred to as a "deed in lieu." The borrower offers to hand over the deed to the property so the lender can take possession of the house and sell it. The lender can refuse to accept a deed in lieu of foreclosure, and it often does, for a couple of reasons. First, the lender has to incur the costs of fixing up the house and paying real estate commissions. A short sale is preferable. Second, the lender inherits any problems with the title. Foreclosure clears away many title problems.
Effect of a deed in lieu of foreclosure on your credit record: Severe.

PARTIAL CLAIM - available only for HUD loans
Under the Partial Claim option, a mortgagee will advance funds on behalf of a mortgagor in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of 12 months PITI). The mortgagor will execute a promissory note and subordinate mortgage payable to HUD. Currently, these promissory or "Partial Claim" notes assess no interest and are not due and payable until the mortgagor either pays off the first mortgage or no longer owns the property.

SHORT SALE
In a short sale, you sell the house for less than you owe. You can't do a short sale without the lender's permission and cooperation. You have to be behind on your payments and be able to demonstrate a financial hardship that will prevent you from being able to future mortgage payments.
Effect of a short sale on your credit record: Severe but better than the foreclosure.

BANKRUPTCY
A homeowner filing a Chapter 7 Bankruptcy will forfeit property and eliminate any potential deficiency. Chapter 13 Bankruptcy provides the homeowner the ability to cure the default over an extended period of time (30-60 months) while maintaining the current monthly payment. However, this does not change the terms of the mortgage, and since the homeowner cannot afford the current regular monthly payment, they may not be able to afford the current payment plus the delinquency amount.
Effect of a bankruptcy on your credit record: Severe.