There's no doubt about it. A foreclosure WILL damage your credit!

If you allow your home to be foreclosed or if you sign a Deed-in-Lieu of Foreclosure:

Both of these solutions affect credit the same. Homeowners will take a hit of about 250 points on their FICO score. This means if a FICO score before foreclosure was 680, it could dip as low as 430. A homeowner who wants to buy another home after foreclosure will end up waiting about 24 months before a lender will offer any kind of interest rate that makes sense. During that time you must have a near perfect credit.

If you choose to do a Short Sale on your home:

The affect of a short sale on a homeowner's credit report is much less damaging. The negative on credit may show up as a pre-foreclosure in redemption status, which will result in a loss of around 80 points from the FICO score. It can also simply show up as the loan was paid off and not affect your score at all. This means a short sale with a previous FICO of 680 could possibly see it fall to around 600 or it could remain the same.

Deficiency Judgments:
The bad news is a homeowner could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. Many states have laws regarding personal guarantees, which could also result in a deficiency judgment if the homeowner is personally liable for loan repayment.

The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted.

If a homeowner is trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit is the main advantage to doing a short sale.