This Question is asked very frequently and involves a number of unique variables. The first thing to keep in mind is that the moment you are 30+ days behind on your mortgage payment, your bank has the right to report to all of the credit bureaus at you are 30 days behind on your payments. When a late payment is reported to the three major credit bureaus, it does have a direct effect on your credit.
After going through a Short Sale or a Foreclosure, most people have multiple 30, 60, and 90+ day late payments reported on their credit report. When the actual Short Sale is completed, most banks will report to your credit report that your account was “paid in full for less than the full amount”. Your credit report may also be marked as “settled”. It is important to keep in mind that each lender has a different way of reporting that a Short Sale was done, but this is the most common language used. If your home were to go to Foreclosure you would most likely see the bank report “Foreclosure” on your credit report. It is difficult to gauge how much damage will be done to your credit score when comparing a Short Sale to Foreclosure.
We strongly advise you to work with a Credit Scoring Expert for more specifics on this topic and ways in which to improve your credit after the Short Sale is complete. Recently, many of clients were able to Short Sale their homes without ever missing a payment. Therefore, they do not have any late payments reported on their credit. When there are no late payments on your mortgage, your credit score is generally not affected. It is possible to maintain a high credit score by completing a Short Sale without missing payments on your mortgage and other bills. Please be aware though, that your lender will still report that a Short Sale was done. So, while you may not see your credit score drop if you continue to make payments through the completion of the Short Sale, you’ll still likely have your account marked as paid in full for less than then full amount and/or “settled”.