Many lenders will modify your loan payments for you if you are in trouble. Even if you are going to lease, it would make sense to try and get a modification since your payments would be lower. Many lenders will work with you if you are not late and will send you to a collection company to negotiate your short sale if you are. Not a good option.
It is a very complex question and can not be answered and should not be answered in a community forum. We have 50 sellers that we are doing short sales for right now and many of them have different situation and we handle each one different. Each lender is different. Some lenders will work better with you if you are paying, some will not. Some lenders will not work with you if you have missed payments. Most of my clients in short sales do not have the money to pay a lawyer so we try and help them the best we can. The best thing you can do is have someone that knows the process working with you and your lender. Ask for a list of successful short sales from the agent before you let them in your door. If they can not provide it, find someone else. Ask them for a list of lenders they have done shortsales with and see if any of them are your lender before you tell them who your lender is.

Hi Valerie. You could look into doing a short sale and take back a note to cover the difference, but you'd have to make payments on the note after the close of escrow. If that's an option, you could sell the house and the bank would not get paid in full at the close of escrow, but they'd get paid the difference over time. Having a $30,000 0 $40,000 note to pay may of course affect your ability to buy another house in the near future because it will affect your debt to income ratio. On the other hand, it could help convince the bank to agree to the short sale without you having to be behind with your mortgage payments. Many banks are these days willing to work out a plan to avoid the cost of foreclosure. The thing right now is that you don't know yet how much the house will sell for and how soon it will sell. In my opinion, unless you decide to rent out the house at least until the market picks up again and you can sell it for at least as much as you owe, you should hire a real estate professional as soon as possible to the property on the market. In the end, you'll have to decide whether you'll be better off having a negative cash flow or monthly payments on the note that you agree to give to the bank in exchange for their short sale approval. Either way, at least you'd be able to keep your credit history clean which is very important in your situation because of the annual background check. One more piece of advice. I'd highly recommend that you also consult with a tax professional about the tax consequences of whatever you decide to do. Good luck to you and keep us posted on what you have decided and how things are going for you.

I agree that if you can make a rent situation or contract for deed work that sounds like that would be your best option all things considered.

Valerie....

I am feeling your anquish here. If a foreclosure will effect your husband's background check....will a short sale or a deed in lieu of foreclosure? Both of these effect your credit scores so they may also effect his annual check.

If it is feasable to rent./lease it out and not have to much out of pocket that may be the best thing for now. It would help keeping your credit in tact. There is always the option to bring money to the table to close but it sounds as if you are getting tight on cash.