Before you consider modification make sure you really want to stay in the home and that you have a realistic possibility of recapturing value. Many homes have lost 50% or more. Next step is to understand what the future income requirements will be, especially if you entered your loan under a stated income or during a period in your industry that will never be the same. If you do not have proper income to afford the property you will most likely be denied. Then you must characterize all of your finances in the best light without committing fraud. You'll want to be careful if you purchased too much home on a stated income loan and now you'll be going full document as the bank and their investor wants to know everything about your income, temporary hardship and you're ability to afford the home going forward. Understand you can still be denied and that only 4% of modification applications were approved in 2009.
A short sale is selling your home for less than the amount owed, usually due a drop in the market value. In many markets where there was an incredible appreciation that will take decades to recapture if ever and you've now lost 40% or more, you'll want to consider this solution. Here is what you want to think about: 1. Home has lost so much value it is unlikely we can recapture the value in the next decade. 2. We are overpaying for this home when we should be putting away money for retirement or our child's education. You must come to the understanding that just getting by is not a way to live and that attachment to a structure is foolish and will not serve you in the future. Fannie Mae has mandated that if a person does a short sale as opposed to letting things go in foreclosure, they can reenter the market and buy again within a 2 year period. However, be mindful that you must qualify at the future of guidelines are unertain but will be full documentation on income.