Consider the effect on your credit report:

You will suffer much more damage to your credit report with a foreclosure than you will with a short sale. It will also take considerably longer to restore your credit rating once your financial difficulties are resolved.
In general, here's what happens:

One of Your Option's is: Full Foreclosure or a Deed-In-Lieu of Foreclosure:

Expect about the same things to take place. Quite often this means a loss of between 200-280 points on your FICO score. A pre-foreclosure FICO of 675 could drop to as low as 395, essentially eliminating you from many years of future credit approvals. It may be as long as three years before you can qualify for another home loan.

Best Option = Short Sale:

Expect to suffer some credit score damage, but nowhere near as much. Loss of FICO points will be around 75-125 and your report will show it listed as a 'pre-foreclosure in redemption', which is far less negative. You will most probably be able to secure a new home loan in about a year and a half.

In any case, it is a good idea to consult with a lawyer, tax accountant (CPA) or a good real estate agent who is experienced with short sales.