Reprocussions of foreclosure on 2nd Home

I purchased a home approx 5 years ago. Decided to do a complete remodel before moving in. Borrowed the funds against the 1st home. The 2nd home is in a flood zone which they have upped the required elevation by 2 ft. This required that the process be split into 2 phases. The contractor made an error and went beyond the permitted scope in phase 1. The City shut down the process indicating the house would now have to be elevated the 2 ft or torn down & rebuilt 2 ft higher. I didn't have the add'l funds to accomplish this. I wrote to everyone from the mayor to the governor for a year with no result. Shortly thereafter my job was phased out because of the downturn in the economy. The house has since been torn down by the city because of non-compliance. For almost a year I continued to make payments on 2 houseswith no job. This drastically depleted my savings so I had to pull the plug on that process.

I have worked on temporary jobs and right now part-time making a fraction of what I was making. Needless to say the 2nd home is in foreclosure now. I had enlisted a real estate agency a year ago and they have a prospective buyer (short-sale). The mortgage on the 2nd home was split into a larger and a smaller loan to procure a better rate - both are in default.

I am sitting on the remaining funds that were to complete the remodeling that should really go back against the mortgage on 1st home. Both banks want extensive information to determine the short-sale process which will bring to light these funds. My question is: what are the ramifications of foreclosure vs. short-sale? What might I expect to be billed for in this process? That is part the reason I have not yet returned the borrowed funds back against the 1st home mortgage.

DCL