A real estate short sell takes place when a house is sold below the total balance owed on the property loan.  A short sell usually takes place when the borrower is unable to pay the mortgage loan on their real estate property, but the mortgage lender decides that selling the property at a moderate loss is better than pressing the current borrower.  Both parties, the borrower and the lender, both agree to a short sell process because it allows them to avoid foreclosure, which involves extrodinary fees for the bank and has less of a negative  impact on the borrower’s credit score. 

A homeowner must be very clear and have in writing a statement from the lender detailing how he will report the short sale once the transaction is complete. The most favorable filing is one that reads "Paid.”  Most lenders will report the short sale as "Settled" on a credit report if there is only a small amount of debt to forgive.  A "Settled" account is equivalent to a 30 to 60 day late payment in most cases, and can put the homeowner in a position to purchase a new home in as little as two years. However, if a bank lists the short sale as "Closed but not paid in full," this could have dramatically devastating credit repercussions for as long as seven years, or as many as ten.

According to the Director of Education for Mortgage Resolution Services, sellers will take a bigger hit on their credit report by going through foreclosure or giving the lender a deed-in-lieu of foreclosure.  He states that the points lost on a FICO score can be lowered by 250 to 280 points in a foreclosure. This means if a seller’s FICO score before foreclosure is 680, it could dip as low as 400.