Does a Short Sale Have the Same Effect on Your Credit as a Deed in Lieu of Foreclosure?

When you realize that you cannot afford your home, its time to start doing damage control to preserve your credit rating, but there is little you can do to keep a high rating. Choosing between a short sale and deed in lieu of foreclosure is like picking your poison. Even though a short sale might be a little less damaging than adeed in lieu of foreclosure, both can turn you into a subprime borrower.

Identification

A short sale and deed in lieu of foreclosure have roughly the same effect on your credit score, according to Les Christie of CNN. However, the actual effect depends on how your lender reports the account. A short sale might have less of an impact because the lender probably reports the account as "settled" rather than foreclosed. For instance, on a score of 780, a settled account does between 105 and 125 points in damage, and a foreclosure 140 to 160 points, says Ellen Cannon of Bankrate.com.

Considerations

Most lenders won't consider either option until you start missing payments, which essentially means you have to trash your credit rating before you can attempt a short sale or deed in lieu of foreclosure in most cases. Once you have several negative items on your credit rating, especially 90-day late payments, your credit rating is so low that a short sale, a deed in lieu of foreclosure or a foreclosure has little effect on your rating. For example, if you have a FICO rating of 680, a settled account can do as little as 45 points in damage, according to Cannon.

Reporting Time Limit

The national credit reporting bureaus can report a short sale or deed in lieu of foreclosure for seven years after the lender closes the account. However, short sales can take up to a year to complete, while a deed in lieu of foreclosure happens within three months. The faster you can close on the mortgage, the sooner you can start rebuilding your credit rating.

Recovery

Conceding your mortgage to the bank is probably better than the other options: foreclosure and bankruptcy. For instance, you might have a deficiency balance left over after a foreclosure, which could mean you need to declare bankruptcy to eliminate it. A bankruptcy usually stays on your credit history for 10 years. Negotiate with the bank on how it will report the account. Ideally, you want the bank to report the mortgage as paid in full, but you will probably have to accept a status of "settled." Once you complete the short sale or deed in lieu of foreclosure, you can start repairing your credit by taking out a secured credit card or other entry-level account and paying the bill every month. Also, tackle any other outstanding debts.