I saw a sign once that read as follows:

“If you have to eat a live toad, don’t look at it too long.  If you have to eat several live toads, eat the biggest one first.”

I think this may be a good way to look at short sales verses foreclosure when it comes to the effect on your credit.  In general neither are pleasant, but foreclosure tends to have more of a negative effect on your credit score than a short sale.

With so many people underwater on their mortgages, banks are sometimes willing to do a short sale even if the mortgage is current.  For some homeowners it may be the only way to salvage some of their credit.  But it isn’t a painless process.  For a more thorough analysis of how short sales and foreclosures affect your credit, click here for an excellent article by Elizabeth Weintraub.