Fact from fiction, truth from diction. From what I gather your home is worth less now than when you purchased it. A short sale will hurt your credit but not as much as a foreclosure. Someone said banks won’t do or shy away from short sales. It looks like you are going to be stepping in pooh, pooh, you just want to get less on your shoes than more. You may have to get creative, it might be ugly but it might save you part of the loaf if it won’t save you all of it.
If I were in your situation I would seek to retain the home but lessen the hit you are taking on it providing you have 20% equity. I would use said equity to purchase some seasoned notes, hopefully 20k or more. You should be able to have an actual value higher than the cash amount you paid. I would add that to whatever funds your wife had to toss to a new home and your contribution to help her. I would take the existing home and lease it out on a lease option strategy. I would seek to get as close to my original mortgage as I could negotiate. To do that I would make it real easy for my leasee to get into my home, I would offer them no money down to move in, however if my mortgage was, say, 2,300K a month don’t know what you actually pay, I would go for 2,000k around about. Now you are only paying $300 and the difference is made up by the family wanting and hoping to get the house one day. If you have a 3–5 year lease option who knows what can happen? They might have more kids and need a bigger home and not exercise the option, then you will get the place back in your total control, it will have been kept up at no, or very little money for you, and it will be building equity back. Maybe they might want it and then you will get a boat load of money from them, and if the property rebounded in value so much the better. Also while you still have it I can only see it helping you greatly tax wise. I know it seems like work, but sometimes things that are worth it are. Good luck