If you are facing a distressed sale of your home I typically advocate a Short Sale over a Foreclosure - especially given the tax exposure if the lender slips into 2013 before foreclosing as the Federal Mortgage Debt Relief Act of 2007 expires 12/31/12. Any deficiency amount will be a taxable event for you (provided the act is not extended into 2013).
You need to make a decision QUICKLY and WITH the help form a CPA ASAP!
FHA financing normally requires THREE years from the short sale; HOWEVER, IF 1) the mortgage payments were made on time within the 12 months prior to the short sale, and 2) you aren't looking to purchasing a similar or larger home in the same area as short sale you can actually buy the very NEXT DAY after escrow closes on your Short Sale.
Conforming loan guidelines state a minimum of TWO years and 20% down; however, if the short sale was due to documentable "extenuating circumstances" (divorce, medical, job loss, death of a wage earner, etc.) then you only need 10% down.
A 7 year waiting period; however, if there are documentable "extenuating circumstances" (divorce, medical, job loss, death of a wage earner, etc.) then 3 years.
page 454 for a summary of option with and without "extenuating circumstances".
Also, you should review this blog post:
"CA Senate Bill 458 Now Prohibits 1st/2nd+ Deficiency Judgments*"
Best Regards, Steve