The national mortgage crisis is affecting millions of Americans and more and more people are facing foreclosure, but a growing number of Americans are choosing to short-sale their homes to avoid foreclosure.

A short sale occurs when a lender agrees to allow a homeowner to sell the home for less than the mortgage owed on it. The lender either absorbs the difference or requires a borrower to pay it back in a lump sum judgment or payment plan.

This allows homeowners to walk away from their houses without going into foreclosure and seriously damaging their credit.

In 2007 there were 2.2 million new foreclosure filings in America, up nearly 80 percent compared with the previous year. The average foreclosure cost lenders $40,000, and the last thing banks and lenders want is more houses to sell.

For many, a short sale is now looking like the last best option. Though it still diminishes one’s credit rating, the short sale is often vastly preferable to other options.

Real Estate Contributor and “Wall Street Journal” reporter Wendy Bounds shared the details on what you need to know about short selling your home on “Good Morning America” today.

Prove inability to make payments

The first thing you need to do is prove to the lender that you can’t make payments at the adjustable level. That will require some filing of paper work, some documentation showing that your income has gone down.

Find a willing buyer

The second thing is to find a buyer who is willing to buy the home at a discount rate. To do that you have to get a knowledgeable real estate agent or attorney involved, maybe someone who specializes in short sales. That’s important because pricing is incredibly important in the search to find the right buyer.

Get lender to approve sale

Lastly, you need to get the lender to approve the sale once you do find a buyer. That’s why it’s important to work with the lender as much as possible. That’s going to make it that much easier for you in the long run.

If you can’t complete a short sale

If the homeowner isn’t able to complete a short sale, the next option is either foreclosure or handing over the deed to the bank in lieu of foreclosure. Those options are worse for your credit than a short sale — that’s why it’s so important to get the pricing right. Work closely with an agent who specializes in this kind of thing and work closely with your lender so you’ll know what to expect.

Your home is your most important asset

Your house is the most important asset that you will own. Be smart and get everything in line, realize when the situation is deteriorating, write a compelling letter to the lender. That way, you’ll be able to get people to pay some attention to you. Pay attention to your home and don’t be in denial about the reality of this market.

Up until recently, homeowners who are upside down on their mortgage had little recourse other than foreclosure. That’s not a good option because a foreclosure remains on your credit record for at least 10 years.

To avoid going into foreclosure, many experts are now advocating a short sale.  In a short sale, the lender allows the property to be sold for less than the total amount due on the loan.   Basically, the bank eats the loss (although they could still demand the homeowner to make some kind of payment or share part of the loss).

When the housing market was booming and real estate values were appreciating year after year, short selling was virtually unheard of.  With the current economic struggles and mortgage crunch, more and more home owners are looking to this practice as a way to avoid a costly foreclosure.

The benefits of short selling over foreclosure are obvious.  A foreclosure puts a long-lasting black mark on your credit history, the process can be long and costly, and will prohibit the homeowner from purchasing another home for at least 7 years.  Short selling can be much faster and less expensive, and it doesn’t look as bad on your credit report as a foreclosure.

Convincing a lender to short sell a property, however, can be very difficult.  For this reason it is best to work with a licensed Realtor that has the designation of a Certified Distressed Property Expert (CDPE).

If you find yourself in distress it is best to curb and scale back your own spending.  Expensive and unnecessary purchases on a credit card will make the bank less inclined to do you any favors.  Also, be prepared that if your bank absorbs the loss, the IRS might treat that as a taxable income and you’ll be responsible for paying taxes on that.

Of course, the better and always best option, is to find some way to stay in the house.  Contact the lender and see if they are willing to restructure the loan, or forgo a couple of monthly payments to help you get back on your feet.  Lenders loan money, they don’t want to become property owners/managers (especially in a declining market) so they are willing to make accommodations to avoid taing the property back.