If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

While there are some significant negative consequences to a short sale, an ever increasing number of properties are being advertised with that label, says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

"A lot of people in the last couple of years have just stretched themselves to the limit and you have people with mortgage payments where even when they got the mortgage, the payment was half their income or more," says Lohrenz. "Now that rates are adjusting, it's two-thirds or three-quarters of their income and it's just not possible."

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, as well.

The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process.

A market saturated with foreclosures can cost lenders billions -- as much as $50,000 per foreclosure -- according to a study released earlier this year by the Joint Economic Committee.

A buyer's dream
For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale could make a lengthy home buying process even longer and more arduous.

Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there's no motivation for the lender to let the seller out of the mortgage at a lower price.

Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved since that second institution would have to agree to forfeit all or part of the money it's owed.

Last gasp only
While getting a lender to agree to a short sale may seem like an answer to the prayers of homeowners who want to unload a house, it's not a good move if you're merely looking to find a new place. It's generally a last ditch effort when the only other option is foreclosure.

Should you go for a short sale? It depends on how deep a financial hole you're in and how likely it is you'll be able to overcome those financial difficulties.

Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.

Be ready to document your need and to show the lender you are serious about your situation, including a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

3 critical safeguards
If you're considering a short sale, experts advise you to take the following steps to meet potential negative consequences head on.

Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

Most of the time, a short sale shows simply that a debt is satisfied. But theoretically, a short sale could reflect on the credit report as 'settled for less than the full balance. Such a designation is a negative mark on your credit report, though it wouldn't hurt your credit as much as a foreclosure would.

Get professional tax advice. Short sales often have tax repercussions since lenders can claim the forgiven debt as income that they provided you.

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

However, there are two "outs," . If you meet the IRS's definition of insolvency at the time the debt was forgiven, then you generally don't have to pay taxes on it.

Or, if your home loan is a nonrecourse loan, you're also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral -- such as the house itself -- and the debtor would not have to pay tax on the sale shortfall. Now, with the Mortgage Relief Act, if the home is a primary residence the tax is avoided all together.

The most common case is that mortgages secured by the property -- especially for buyers who made a 20 percent or more down payment -- is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don't dig a deeper financial hole as a result of the tax situation.

The steps associated with a short sale are as follows:

    1. Listing the Property - This is a given as one cannot have a short sale without a buyer for the property.  That in addition to the lender will be responsible for paying all costs associated with the sale, i.e. commissions, it would be wise to hire a qualified professional, preferably one with a lot of experience. One major factor is pricing the property, anyone can ask what they want and it could be the deal of the century but if the bank doesn't accept the offer it was a waste of time.

    2. Writing the Hardship Letter - This is the letter to the bank explaining why you need to short sale the property. For example, if you went through a divorce and now are only able to afford half the payment. This is necessary for every lender, your real estate professional should be able to assist you to a limited degree.

    3. Putting together the Short Sale Package - This varies from lender to lender. Some packages can be as many as seventy-five pages long while others might be ten pages.

   4. Giving Authorization - You will also need to provide an authorization letter which will allow your professional to negotiate with the lender on your behalf.

   5. Offers and Contracts -