A short sale occurs when the seller of a house cannot sell the house for what he owes the mortgage lender. If the seller meets certain criteria as set by the bank, the lender may elect to accept a lower amount than what is owed. Depending on the state, the seller may or may not be responsible for a portion of the amount the lender is "shorted" during the sale.

Significance

The short sale itself will cause you to lose approximately 75 to 125 points on your credit score. It may be reported to the credit bureaus as a preforeclosure or as a settlement, depending on the bank's policies.

Considerations

While the short sale will ding your credit, paying late for many months may cause your credit score to fall even more. Since many banks will not consider a short sale unless you are already behind on your mortgage, the hit to your credit score may total 200 to 300 points.

Benefits

In comparison to a foreclosure or a deed in lieu of foreclosure, a short sale will impact your credit score less negatively. After a foreclosure, you will not be able to apply for another mortgage for three years. After a short sale, you can usually apply after two years, and may qualify for a high-interest mortgage after an even shorter period of time.

Other Implications

Besides the immediate drop in your credit score, be aware that your lender may send you a 1099 tax form at the end of the year. You will need to claim the amount that is "short" as income, and may face a large tax penalty.

Warning

Do not proceed with a short sale without talking to a lawyer or accountant about your options, your credit scores and your possible tax liabilities.

Source:

Effect of Short Sale on Credit

Buying a Home After Short Sale

How Will a Short Sale Affect My Credit