You might ask, "What is a short sale?" or "Is there a difference between a short sale and a foreclosure?"
In short (no pun intended), a short sale can be more favorable than a foreclosure because it is less harmful to your credit report. However, there are 2 things to keep in mind... 1) your lender must approve a short sale (and may still expect you to pay the difference), and 2) the I.R.S. usually looks at a short sale as a forgiveness of the portion of your mortgage you weren't able to cover. For example if your unpaid mortgage balance is 250,000.00 and you are unable to remain current on your payments, but the market value of your home is only 230,000.00, your lender may accept a short sale. If this happens, and you are able to sell your home for 230,000.00 the I.R.S. may expect you to include the $20,000 forgivness as income. Be sure to ask a Certified Public Accountant for advice. In many cases, a lender would prefer a short sale to a foreclosure because they will recoup more of their money. However, if it makes better financial sense for the lender to foreclose, they probably will.
Read the article Real Estate Short Sales - How to Handle Real Estate Short Sales at about.com