Yes, a short sale almost always hurts your credit.
More Info: If you have sold your home for less than you owe, which is the definition of a short sale, it will affect your credit negatively.
One of the advantages of opting for a short sale rather than a foreclosure is that the short sale affects credit less substantially. Opting to sell and move before payments are in arrears could help to mitigate the damage to your credit and get you back on your financial feet more quickly.
Are Payments Being Made?
Often a bank will suggest a short sale when they are not receiving mortgage payments from a borrower. Their main concern is to get as much money back on the loan as they can. On the other hand, a borrower may decide to do a short sale when they meet up with unfortunate circumstance and know beforehand that they will not be able to continue to make payments on time. In the latter case, if the payments are kept current until the short sale is finalized, and the lender considers the sale payment in full, credit is less likely to be affected as poorly.
Short Sale vs. Foreclosure
In most situations, those who need to do a short sale are having trouble making their payments. In this case, it is believed that a short sale affects credit similarly to a foreclosure. Depending on the borrower’s current credit and the situation, with a foreclosure or short sale, their credit score may drop dramatically. This will have a very big effect on how soon after they will be able to get any type of loan. Fortunately, they will be able to get another mortgage for a new home sooner with a short sale than with a foreclosure.
Is a Short Sale Worth the Credit Damage?
Whether you do a short sale or have your home foreclosed on, your credit will be affected adversely. If you can’t make the payments on your home and you can’t sell it for enough to pay back the loan, a short sale may be your last resort. If you plan to buy a home in the future, it is probably the better choice.