Losing your home to foreclosure due to an inability to keep up with your monthly mortgage payments is one of life's most unpleasant experiences. It is also an event that keeps on affecting you long after your home is history by devastating your credit score.

One possible outcome of a foreclosure is the lender taking your house. Not only could you lose your house, but the lender can get a judgment against you for what you owe plus his costs for the foreclosure action. If that isn’t enough, your credit report will be in terminal condition for many years to come, worsening an already bad financial situation and making it very difficult to obtain any other kind of credit. There is no upside to foreclosure. It should be avoided at all costs.

A short sale is a popular option for homeowners mired down with financial problems. In this case, you would sell your home for less than what you owe your lender; the biggest problem you will face is getting your lender to agree to a short sale. In many situations, they will not. Experts advise pursuing this option the minute you realize that you are falling behind in your payments and most likely won’t be able to catch up. The longer you wait and the greater the amount you are in arrears, the less likely it becomes that your lender will even be willing to discuss a short sale.

According to a recent Bloomberg article, short sales of real estate have grown exponentially, reaching a three-year high in the first quarter of 2012. RealtyTrac Inc., a California data service, reported that there were 109,521 short sales in the first quarter of 2012, which represents a 25% increase over last year. There have not been this many short sales reported since the first quarter of 2009. As a result of these statistics, it is expected that short sales may outnumber foreclosures in the near future.

Short sales typically occur prior to formal foreclosure proceedings, when a mortgage lender permits a home to be sold at a price that is less than what is still owed on the mortgage by the homeowner. The short sale process allows a homeowner who has fallen behind in mortgage payments to become free of his or her mortgage debt by selling the home with the bank's approval, even at a lower price than the existing mortgage balance. The average discount today on a short sale is reportedly 21%, as opposed to an average 33% discount on sales of homes who have gone through the entire foreclosure process.

While banks take a loss on the outstanding mortgage payment, they do avoid the costs of mortgage foreclosure proceedings and the headache of maintaining and attempting to sell the real estate in a still-faltering housing market. By working with homeowners who have become delinquent in their loan payments, banks not only minimize their losses, but they avoid legal challenges to foreclosure proceedings and benefit from government incentives such as President Obama's Home Affordable Foreclosure Alternatives program, which pays both lenders and borrowers for completing a short sale.