If you short Sale you wont be able to buy a home again at least for 2 years.
If you go to foreclosure, worst.
If you live on the property, your family wont fit.
then, Rent it. You might not get the whole Mortgage payment but that could be better than have bad credit.
Anyway, you might not be able to buy another property because you are underwater and lately Lender are requestion to have equity on properties to buy another one.
Could your "Family moving in" apply for a Mortgage and be approved?
Maybe you dont need a larger home, you need another home for your Family moving in.