Homeowners unable to afford their mortgage payments can sometimes negotiate an agreement with lending institutions to sell their home for less than their mortgage debt -- preventing foreclosure, a harrying process for both lenders and sellers -- and, in many cases, absolving debt while preserving credit.

"Both short sales and foreclosures are considered 'negative information,' so they stay on the credit report for seven years," said Patricia Guertler of Consumer Credit Counseling Services (CCCS), a nonprofit organization offering free counseling to homeowners. A foreclosure, however, is more damaging to credit than a short sale, she said.

While a short sale is still a mark against a homeowner, "credit is something that can be rebuilt -- and if the damage is only on the mortgage and if [the homeowner is in good standing, it is not going to destroy credit completely. ... It will drop your credit score but not [to the point where it is completely irreparable," Guertler said.

For a short sale to proceed, the homeowner's lenders must accept the buyer's offer. Lenders may refuse a short sale, particularly when a homeowner is behind on payments and the lender has taken steps toward a foreclosure.

"It is always up to the lender. It is the golden rule. The people with the gold make the rules. If they want to give the borrower a break, then they can do it. That is why ... what you want to do is contact the lender. That is the easiest and most efficient first step you can make. The lender may be willing to help you," said Dave Lang, real estate attorney at the law office of Peter N. Brewer in Palo Alto.

Daniel Herzberg of San Mateo's Redwood Capital Group called Palo Alto "one of the most insulated areas in Northern California.

"But if you went 60 miles east to Stockton, you would be in the worst foreclosure market in the United States, for two years in a row. Homes over there have dropped 30 to 50 percent of their value, in some cases more," he estimated.

Lanny Danenberg of Keller Williams, Palo Alto, said though she has not yet seen short sales in Palo Alto, she does receive calls "on a regular basis from people on the Peninsula, from all over -- from San Mateo to Sunnyvale. ...

"I find that they are scared. They have no idea what their options are, for the most part. They are sitting on their hands waiting because they have no idea where to start," she said.

And sitting on one's hands, waiting, is exactly what some professionals say is the last thing a homeowner should do.

"People need to be honest about whether they can afford their homes or not because the longer they wait, the more devastating the financial consequences," Herzberg said. "Even if you don't get approved for a short sale and you go to foreclosure, at least you won't be losing your life savings, going into your 401(k) plan, losing other property, or your IRA" by trying to make payments, he continued.

"Ideal" short-sale candidates are homeowners with credit ratings worth preserving who are still making mortgage payments, Mariwyn Evans wrote in "How to Succeed at Short Sales." But according to David Knight, Wells Fargo vice president and home mortgage manager, evaluating candidates for short sales involves more than Evans' statement suggests.

"We get an evaluation on the property. We also speak to the mortgager and go through the financials," Knight said.

Financial assessment typically begins with a "preliminary net sheet" submitted by a homeowner or real estate agent. This document estimates the home's expected sales price and the anticipated costs of the sale. A short-sale applicant may also submit a "comparative market analysis" demonstrating that the current market price falls short of the homeowner's mortgage debt, Elizabeth Weintraub wrote in "Short Sales in Real Estate."

Common financial disclosure includes a homeowner's income and assets, verified by copies of bank statements, savings and investment forms. Additionally, lenders evaluate homeowners' personal circumstances, described in a "hardship letter."

Whereas evidence of homeowners' financial security convinces lenders to offer mortgage loans in the first place, circumstances of dire hardship make short sales more compelling from the lender's perspective. "The investor will say, why should I do the short sale if there is no challenge for the mortgager? ... The investor will be more willing [to accept a short sale if it is clear that the mortgager cannot afford the property," Knight said.

Lenders more readily forgive debt for homeowners with modest salaries, who lack assets such as stocks or savings, and who recently experienced traumas such as illness, job loss, a spouse's death or divorce.

Though executed more quickly than foreclosures, short sales are time-consuming -- for lenders, homeowners and real estate agents. To hurry the process along, Herzberg said he and other agents make sure paperwork is organized and submitted in a way that will get the sale approved.

"If one page is filed incorrectly, it can cause the whole short sale to be thrown out. So it is very meticulous work," he said.

"A lot of banks, they are bombarded. They are overwhelmed with so many homes trying to go through with short sales that they have a difficult time trying to keep up. And, it is hard to get in touch with them. We constantly have to contact them with updates," said agent Ferdinand Piano, of Intero Real Estate Services, San Mateo, who was handling a short sale in Menlo Park.

Short sales take longer than standard sales -- anywhere from 30 to 180 days, Herzberg said. In part, the process drags on because necessary procedures such as home appraisals take time. The appraisal alone can take 10 to 17 business days, Knight said. Discussions between the many players involved -- homeowners, real estate agents, banking institutions, mortgage insurers, investors and others -- also take time.

"It's a lot of 'back and forth,'" Herzberg said.

Some of the "back and forth" occurs because homes with second mortgages require both lending institutions to approve the short sale. "If the home has a second mortgage, you have to get the second mortgage institution to release lien," Knight said.

To speed up the short-sale process, Knight's "number one recommendation or request" to homeowners and their agents is to "let the [bank's servicer know when you are listing properties... We can order the appraisal ahead of time; we can knock 17 days off. As soon as you know you have that contract to sell that property, let us know and we can start action that will shorten your time to get a decision," he said.

Short sales can result in discounts to the buyer between 8 and 20 percent below the home's market value, according to Evans. Second-mortgage lenders heed offers for a few thousand dollars on their loans, "cents on the dollar," because the alternative -- foreclosure -- could bring in even less return on their loan, Knight said.

Traditionally, second-mortgage lenders accounted for the risk of default by charging homeowners elevated interest rates. Many banks, however, were unprepared for the current housing crisis. "We're going through an unprecedented environment," Knight said. "A lot of smaller banks have closed because they are not getting paid," Piano said.

When lenders do approve a short sale, sites such as MSN Money.com advise homeowners to safeguard themselves by procuring an agreement -- in writing -- that the sale absolves their debt. Jose Romero of Plaza Real Estate in San Jose, who has a short-sale listing in Menlo Park, has observed lenders requiring repayment. "Some banks issue what they call a 'soft note,' ... basically a balance that the borrower would carry after they settle on the transaction," Romero said.

After successfully cancelling thousands of dollars of debt, a homeowner may rejoice -- only to discover that, to the Internal Revenue Service, the forgiven debt represents taxable income. "A nonrecourse loan may not necessarily give you the [tax protection that you think you have, if you took equity from the property going into foreclosure to put into other properties; if you refinanced," said Alan Olsen, managing partner at Greenstein, Rogoff, Olsen & Co., an accounting firm with an office in Palo Alto.

Given the complex financial and emotional challenges faced by homeowners who cannot afford their homes, CCCS' Guertler says homeowners' best bet is "to get as much information and to act as soon as they realize they won't be able to make their payments to their lenders." Though she advises homeowners to act swiftly, she also offers a warning:

"Be careful of fast or easy solutions companies may offer -- because there are no easy or fast solutions. The only one that can help them at this point is the lender because they are the ones who hold the loans."