I cannot offer up much advice on what you should do, I will defer to the mortgage folks. I can however explain what might happen to your scores since you asked. In terms of FICO scoring, a short sale would be treated almost the same as a foreclosure or a deed in lieu of foreclosure. If any balance and/or past due amounts are also being reported, this will lower scores even more. In fact it can get even worse if the amount owed is high, the higher the balances the bigger the hit will be to your scores. How much is hard to say but this type of serious derog would do as much damage as a collection, CO, judgment or any other public record.