"How Will a Short Sale Affect My Credit?" 

Your credit affects your ability to procure financing and obtain favorable rates.  A Short Sale will often be reported to the credit reporting bureaus by the lender. Fannie Mae, the nation's largest backer of mortgages, affecting millions of loans, has announced recent favorable changes regarding its view of Short Sales and how they affect the credit-worthiness of borrowers.  The Fannie Mae policy indicates that Short Sales are preferable to Deed-in-Lieu of Foreclosures and straight foreclosures.  Following are excerpts from the new policy guide, published June 25, 2008:

Establishing a new policy for preforeclosure (Short) sales . A preforeclosure sale involves the sale of the property by the borrower to a third party for less than the amount owed to satisfy the delinquent mortgage, as agreed to by the lender, investor, and mortgage insurer. Due to the increased incidence of preforeclosure sales, Fannie Mae is establishing a 2-year elapsed time period for reestablishing credit following completion of the action.

Time Period After Preforeclosure Sale: 2-year time period from completion date. Additional Requirements: None 

Deed-in-Lieu of Foreclosure: 4-year time period from completion date (date deed-in-lieu executed) Additional requirements that apply after 4 years up to 7 years following completion date: Borrower may purchase a property secured by a principal residence, second home, or investment property with the greater of 10 percent minimum down payment or the minimum down payment required for the transaction. Limited-cash-out and cash-out refinance transactions secured by a principal residence, second home, or investment property are permitted pursuant to the eligibility requirements in effect at that time. ** Note- 2 year time frame only applies with "extenuating circumstances"

How does Foreclosure affect credit? Kenneth R. Harney, of the Washington Post, recently wrote  "Walking Out of a Mortgage And Into Years of Hurt " , about ramifications of foreclosure.  Some the highlights:

1. Fannie Mae, the major federally chartered mortgage backer, will not allow borrowers with a foreclosure to get another Fannie Mae-backed mortgage for 3-5 years, and only with a minimum credit score of 680.
2. Freddie Mac, federally chartered to support the secondary mortgage market, sees foreclosure as a major negative on credit for seven years.
3. FICO scores count foreclosures as nearly as bad as bankrupty.
4. Freddie Mac and Fannie Mae loan applications include questioning the borrower on whether they have ever had a foreclosure or deed-in-lieu of foreclosure.  If so, the loan is more critically analyzed, and may not be so easy to obtain.

In summary, a Short Sale is the best choice when it comes to ability to secure future financing.