Here's my take on the DIL vs SS vs FC
In my opinion, there's no benefit in going through the throes of a short sale unless you're able and willing to stay current on your loans the entire time (up through close of escrow on your SS deal). Other than credit preservation, however, I believe SS is an onerous and futile process. Same with a DIL, which lenders hate to do, and thus have erected many hoops for borrowers to negotiate in order to effect one. If I come across as jaundiced, it's because of reading the posts and experiences of others! Bottom line: If credit preservation is important, do not stop making mortgage payments.
1) DIL - Deed in Lieu of Foreclosure: This is a real ordeal since loan servicers don't like doing them, and hence make borrowers jump through a multitude of hoops to accomplish one. The homeowner is required to provide financials to the lender. And the homeowner can earn no $$ for all the hassle. Usually the lender will require the property be listed for sale for a minimum of 90 days to qualify. In addition, the property normally cannot be encumbered with any other liens, e.g. junior loans, unpaid property tax, judgments, etc.
2) SS - Short Sale: Another solution that is a major pain, but the real estate industry loves and evangelizes them. The loan servicers also revere them because they know the homeowner will maintain the property in viewable condition. Meanwhile the homeowner gets no $$ for all their work and patience. Only reason to do one is credit preservation, and that is possible only if the homeowner has never been late on mortgage payments and can remain current through close of escrow of the SS deal. Another major disadvantage is that the borrower is required to disclose their financials, which is almost never a good idea, and is akin to pre-trial discovery.
3) Foreclosure: This is by far the least hassle. You don't communicate with your lender(s), aren't at their mercy, don't disclose any info to them. It's just easy. However, the downside is the derog credit hit. Recourse status of a 2nd is immaterial because if the homeowner walks, and the 1st forecloses, the 2nd will be wiped out and become a "sold out junior." If that loan is recourse, they could conceivably sue you. But that’s only very rarely happening. Almost no "sold out junior" lenders in any state sue for money owed on the note, even though they're not legally barred from doing so.
For those residing in a judicial FC state, the possibility the lender might pursue a deficiency is not addressed here due to the legal complexities. Consulting with a RE foreclosure defense lawyer in that state is recommended.
Borrower Credit File/Score Impact
While many believe a SS or DIL may have a lesser impact on the borrower’s credit score, that has not proven to be the case. The following information is quoted from Fair Isaac’s site. FICO was developed by Fair Isaac.
"The common alternatives to foreclosure, such as short sales, and deeds-in-lieu of foreclosure are all 'not paid as agreed' accounts, and considered the same by your FICO® score. This is not to say that these may not be better options for you from a financial perspective, just that they will be considered no better or worse for your FICO score.
If you are considering bankruptcy as an alternative to foreclosure, that may have a greater impact to your FICO score. While a foreclosure is a single account that you default on, declaring bankruptcy has the opportunity to affect multiple accounts and therefore has potential to have a greater negative impact on your FICO score."
And this quote is from an article in First Tuesday http://firsttuesdayjournal.com/
"The destruction of FICO creditworthiness experienced by a homeowner who participates in a short sale is as dramatic as that wreaked by a foreclosure, since homeowners must default before the lender will even consider a short sale. The short sale/foreclosure which is ultimately reported will indicate that the owner did not repay the loan as agreed.