Great Question and one of the most common questions asked regarding this subject matter....and one of the most improperly answered.
Here is the real answer: NO ONE REALLY KNOWS COMPLETELY!
Yes, most will admit logically that the foreclosure is worse for your credit than the short sale, yet none of us know what the future holds. I had a customer walk from and 8 plex in the early 1990's and refinance into an "A" paper loan less than one year later.
No one can tell you how much your credit score will go down. I listened to an analyst from Lloyds of London explain the credit scoring system and it would be easier to speak Mongolian than try and understand or repeat what he said. Many factors contribute to your score reduction including but not limited to whether you are paying your other debts, how many months you miss your mortgage payment, if there have been previous defaults on loans or credit card payments in the past, and on and on........
With the quantity of credit score damage currently taking place with the american public, we don't really know what lenders will do 4 years from now to encourage folks to get loans. What if the credit score system completely changes. They've been talking about it.
Just make the right choice by doing good homework. There aren't many reasons to allow a foreclosure if a short sale will work.
Matt Clausen, Broker
Clausen Group Realtors
Greater Nashville Area