Short selling will damage the credit for 24 months, and Fannie Mae guidelines state that the seller is able to receive a new home loan is as little as 24 months from when the short sale was closed. On the credit report, the short sale will report as a debt settlement, not a foreclosure. Foreclosure will also damage the credit. However, most lenders will not lend to a homeowner for at least 10 years after the foreclosure. In addition, the credit report will read "foreclosure" and this will most likely affect the homeowner's ability to get any type of financing for many years, including credit cards, auto-loans, and of course, home loans.
Additionally, in most states, completing the short sale will give the seller the best opportunity to walk away without owing the bank anything. In fact, some states have passed new laws making it illegal for banks to pursue the seller after the short sale is completed - CA has passed such a law. Most of the time, this law is not applicable through foreclosure (like the one in CA). Many people believe that foreclosure will hurt their credit but at least they are off the hook for the loan amount - nothing could be further from the truth! A foreclosure will most likely result in bad credit AND a deficiency judgement and the bank pursuing the homeowner for a lot of money!
Finally, there is the privacy issue. A foreclosure involves a public notice and a public auction. Notices will placed on the door, bank representatives will come to the house, and the bank will call you over and over again... and they will not be pleasant. In fact "just walking away" is going to be more stressful than anything else!
We understand that this is an emotional time, and, more often than not, the seller has been wronged in some way by their lender. However, we must set emotions aside, and make the best decision for the future. When looking at the facts, short selling a property vs. foreclosing is always the best move! If you procrastinate the decision can be taken out of your hands and the lender will opt for a foreclosure. Don't let someone else decide your fate, do your research and decide which route is best for you.
You can about the CA law by searching for California Senate Bill 931, Section 580(e).
