I have been asked a fair number of questions lately on how a seller's credit is effected by a short sale. The effect on your credit report - foreclosure vs. short sale - is the difference between being hit by a train or a bus.
Sellers will take as big a hit on their credit by going through foreclosure as giving the lender a deed-in-lieu of foreclosure. Both of these solutions affect credit the same. Sellers will take a hit of 200 to 300 points, depending on overall condition of credit. This means if a seller's FICO score before foreclosure was 680, it could dip as low as 380. A foreclosure or deed-in-lieu of foreclosure stays on your credit record for 10 years.
The effect of a short sale on a seller's credit report is identical to that of a foreclosure. The ding on credit will show up as a pre-foreclosure in redemption status, which will result in a loss of 200 to 300 points. This means a short sale with a previous FICO of 720 will see it fall from 520 to 420 points. A short sale stays on your credit record for seven years.
A seller who wants to buy another home after foreclosure or deed-in-lieu of foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
A notation on a seller's credit profile of 'settled for less than owed' (short sale) precludes the seller from obtaining an institutional loan for 24 months, depending on the lender's program and regardless of the FICO score. Fannie Mae guidelines require 24 months seasoning, and there's no way to get around this.
The bad news is a seller could be subject to a deficiency judgment after a short sale or foreclosure for the difference between the loan amount and the amount paid, less any mortgage insurance collected by the lender.
In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Some other states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the seller is held personally liable for loan repayment.
The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate attorney.