Either way will hurt your credit to varying degrees. There is no pat answer. It all depends on your specific situation, and who the lender is that you are dealing with. Just being upside down on a loan does not constitute a good reason for a short sale. You will need to prove financial hardship to your lender before they will approve a short sale. Even then, it's not guaranteed that you will be successful selling short. I would start with a conversation with your lender to see what kind of assistance they are willing to offer, if any. Your possible choices would be a loan modification, short sale, deed in lieu of foreclosure, or foreclosure. Foreclosure is your worst option since it can come back to haunt you for many years and you will end up owing much more money to the bank than by facing the problem straight on right now. Fair warning...This will be a long, tedious, and frustrating process no matter what route you ultimately choose. Stay dedicated to seeing it through to the end, and keep the faith. When you come out the other side, you will be in a much stronger position.