If you do a short sale, the lender is going to release their lien on your property.

The buyer who you find will step in and provide funds at closing.

The funds will go to pay the real estate agent and closing costs, and the balance will go to the lender.

You won't see a dime.

But what happens to your credit score in a short sale? What are the short sale effects on credit score?

A lot depends on two things. How good a negotiator are you? If you have the right information you can often get the bank to agree to report "paid settlement" to your bank. Or if not, at least you can work on this so it is not reported as a foreclosure. Best is getting an Unrated. Unrated is neutral on your credit report.

The other thing that credit score depends on is the bank not coming after you for their financial losses. They may be able to go to court and file a civil suit against you for the balance on the loan. Even though the bank has released the loan, they still have a financial loss. They are doing the short sale to make the situation as good as it can be. But the bank may want to pursue you for the amount still owing.

Sometimes the bank will issue a 1099 to you for cancellation of debt income and will simply write off the rest of the loan. This is a good situation for you because if you explain to the IRS (using a form they provide) that you are insolvent, meaning you had a negative net worth at the time you did the short sale, there is usually no taxable income. And if the bank writes off the rest of the loan, they are not going to go after you for it usually.However, both factors impact on short sale FICO score effects.

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