Is Short Sale or a Foreclosure Better for My Credit?

The following question was sent to me by a Facebook friend.  I get this question once or twice a month. If you have any credit related questions please feel free to send them to me via Facebook or Twitter @johnulzheimer.

Q: John, I get very confused about something. I have a real estate agent that says I should short sell my house. I like her idea because I do want to get rid of my house and I can’t sell it for enough money to cover my loan.  I’m about $35,000 under water. I’ve done some research about short sales and some people, like my agent, say they’re better than a foreclosure for your credit scores.  I’ve also read that they are as bad.  In fact, some of your articles say that they’re just as bad as a foreclosure.  Can you please clear up the issue?

A: Thanks for your question.  A short sale is a settlement.  The lender agrees to take less than they’re owed and considers the loan to have a $0 balance. It’s certainly not paid in full but the lender is satisfied with what they’ve been paid and they move on, as do you. Short sales are not better for your credit scores than foreclosures, that’s not true and anyone who is banging that drum is either uninformed, or they’re not being completely honest with you. A short sale is reported as a settlement on your credit reports and a settlement is one of the FICO major derogatory items, just like a foreclosure. Think about it as an incident of a lender not getting all of their promised money back.  A short sale and a foreclosure both meet that definition.

Now, don’t get me wrong…I really like short sales. In fact, I’ve often kicked around the idea of selling my house that way. The problem is you have to have a hardship or the lender won’t approve the short sale.  Plus, I don’t want a settlement to show up on my credit reports because it would destroy my FICO scores and I’m not up for that.

Also, read >  Manage Your Credit With This Guide for Dummies

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at, the credit blogger for, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.