A short sale is often used by homeowners to avoid the negative effects of a foreclosure. However, they may often wonder what exactly the effects of a short sale on their credit score is to determine if a short sale is really a better option than foreclosure. To start with, the homeowner can have the advantage of staying in the property for free for a duration of four to 12 months before he is forced to leave the house. On the other hand, a short sale means that he will have to vacate the home almost immediately after the sale.
If the property undergoes foreclosure, the credit score of the borrower drops by 200 to 300 points. But with regards to the effect of a short sale on the credit score, the difference with foreclosure depends on how late the payments have been. If the borrower has been late in his payments by 60 days or more, the credit damage for a short sale will be the same as that for a foreclosure.
However, it should be noted that the reduction in credit score is caused by the payment arrears and not by the short sale itself. Therefore, if you are much less than 60 day days, the credit damage will be substantially less than that for a foreclosure. However, the credit damage caused by a short sale may occur when the lender reports the shortage to the credit bureau. This will be noted as a derogatory report for the borrower and this may stay on his report for seven years.
