As previously mentioned, Michigan is a recourse state.
While you may be able to purchase the current home, your credit will 100% be affected if you finalize a short sale. Some lenders require you to be delinquent on your loan before they will negotiate a short sale, so your credit would go down there. If you settle for less, then your credit gets dinged too with that on your report and you're prevented from purchasing another home for three years from that date. That is a fair trade for many people, as they would already have their "new" home and don't care about the three year penalty period.
You may want to consider renting your current home as being an option. You're going to have to write a letter of intent when you purchase the new home to appease the lender, so make sure you're honest in what you write -- if you say you plan to short sale the current one, they may deny you from getting the new loan. If you say you plan to rent it and then don't and the files ever come back and get audited, then you could find yourself in an ethical (and possibly legal) dilemma.
Many people do choose to do this, so you're not alone. I just think that not enough time has gone by to see how the banks will come back at people for more money, if ever. One thing is for sure -- when you seek out your short sale, make sure you get a full deficiency waiver to exempt yourself from any further recourse.
If you want some private advice, let me know.
Keeping that in mind, please drop me a line at the below email address with any additional questions. If you decide you want to buy and/or list, I would love the opportunity to help you with your real estate needs.
Jeff Gushman - REALTOR