I agree with Keisha in that your lender will say that they want you to do one or the other within their system. HOWEVER, there's intent and reality. Many of my clients (I am a home retention consultant as well as short sale certified) that I have coached and want to keep their home pursue the loan modification evaluation, only to be denied with no time to obtain an offer on a short sale before the the home forecloses. That's not fair to homeowners who are honestly trying to be part of the solution to their dilemma.
August 1, the HAFA program was rolled out for Fannie Mae and Freddie Mac loans as well as commercial lenders who had volunteered for it. That has helped streamline and put more focus on making sure the loan mod/short sale effort is completed and not sabotaged by the home foreclosing in the middle of that effort.
My recommendation? The same paperwork is required to be evaluated on the loan mod, and short sale so prepare the file, then contact your lender. Make sure you're working with a realtor with experience on short sales (write if you'd like a list of questions to ask beyond 'are you experienced with short sales?'). First and foremost, DO YOU HAVE AN ALLOWABLE HARDSHIP? Then determine what your situation is relating to number of liens on the property that need to be resolved, is there mortgage insurance (MI), Are any of the loans Fannie Mae or Freddie Mac?
If this is your primary residence and you are living there, almost all lenders are reviewing your situation through HAMP (loan mod) automatically, before evaluating the short sale under HAFA. Beyond that, they may evaluate you under lender-specific programs as well. Both the HAMP and HAFA programs are supposed to stop the foreclosure process during the evaluation. But this is a work-in-progress and each situation is unique as to a foreclosure happening in the middle of your efforts.
So the answer is always, 'it depends' on your situation and your real desired results. I prefer to play the odds, if you've already received a Notice of Default (NOD) and do both so I have an offer in place, if it makes sense....