Legal Question in Real Estate Law in California

You are lucky to have a 30 year fixed. Most of the problem loans that I see are Adjustable Rate Mortgages (ARMS). I'm not sure why you feel the need to short sale just because the market value is currently depressed. Buying a home in California is a long range investment, not a get rich quick scheme like commodities trading or speculating on the stock market.

Short sales are a remedy for property owners who face foreclosure. They always require the lender's consent.

There is a new anti-deficiency provision, which went into effect January 1, 2011. This provision prohibits a deficiency judgment after a lender has approved a short sale on a first deed of trust on property with a dwelling containing no more than four (4) units. http://law.onecle.com/california/civil-procedure/580e.html

Notwithstanding that provision, I have received reports that some borrowers are facing collection companies attempting to collect the remaining balance after a short sale.

A residential lender has two choices on a defaulted first mortgage. It can do a trustee's sale or go to court for a judicial foreclosure and a default judgment. The former process is relatively quick and cut-and-dried. The latter is hands-on, time consuming, and somewhat uncertain as to result. We find standard institutional lenders showing a strong preference for trustee sales, and default judgments cannot result therefrom.

I would say you are pretty safe unless there are some unusual factors in your loan. Conditions that might increase your risk of a judicial foreclosure would include: (1) The lender suspects you of loan-application fraud; (2) You are a wealthy guy with lots of obvious, readily siezed other assets; (3) You have failed to maintain the collateral properly, by neglecting maintenance or failing to pay the property taxes, for example; (4) The lender is a small, non-institutional one, such as a family trust or small-business retirement fund that can ill afford a loss; or (5) You have been uncooperative with the lender or otherwise have gotten yourself in its crosshairs.

Finally, if you can manage it, close your new acquisition before you commit to disposing of your existing home or you may end up needing to rent.

You may be pre approved, but you will find to your shock and dismay that such approval is probably contingent upon you not having another mortgage obligation eating up your available qualifying income stream. Thus, if you can sell the first house, you may be able to get the new loan, but if you default, get foreclosed, or short sale with all the adverse consequences on your credit score, that pre approval is likely to disappear into thin air along with your credit score..