You should check with an attorney in your state to fully understand your options. However, Denise is almost certainly correct. You will have trouble showing financial hardship with the equity in the larger home. And foreclosure will trash your credit score for a long time, so that may be out of the question as well. A lot of people in your situation are renting homes, which could be a good option for you.
As for using the equity in the larger home, I would consider talking to a mortgage broker about refinancing that home to come up with the extra cash. This may be a better option than taking out a second mortgage. Seconds have higher interest rates. At a little over five percent, the interest rates on first mortgages are very good right now. If the original loan on the larger house has not been refinanced, you may make up some of the $20,000 loss on the second home through lower payments on the larger home. Also, if you do not plan to be in the larger home for many years, you might consider a five or seven-year adjustable rate mortgage, which would lower your interest rates and, thus, your monthly payments even more. These loans will likely go up after the initial period, but many people, especially newlyweds, move before the rates jump. Five-year ARMs are now running about four percent.
I hope this helps.
Assuming you're not going to do a short sale, you need to figure out how to come up with the difference between what you own on the loan + closing costs and what someone will offer for your home. If you don't have savings or other liquid assets available, then you can consider refinancing your other home. If you have a 401k, you might be able to take a loan from your own 401k account. There's trade offs and additional expenses with either of these options. If you don't have liquid assets, I like the idea of renting the home out for a while. If you can rent it out and get enough to cover the mortgage and all other expenses plus bank a couple hundred a month, then you can use the rent to give you time to save the $s needed to bring to close and the rent can even help build up this sum.
Unfortunately this is a painful financial decision any way you look at it.
You could try to sell it at breakeven price. Mortgage plus all expenses. But, the biggest problem is that even if you get an offer for full price, if buyer requires financing, appraisal might show a lower price.
In FHA financing the sales price is protected and if property doest not appraise sales price, purchase contract is canceled.
In a conventional mortgage, lender, to my understanding, will lend under the appraised value not under the sales price.
Another option is, set it at current market value and bring the difference at closing so credit is not damaged.
It seems that the smaller one is a rental, check with your accountat the tax repercutions of selling such property in Short Sale, wich is your last resort. It might show up on credit report as a foreclosure.
Keep asking questions!