I don't think it's going to work. If they apply for a new loan to buy a home, they are going to go through underwriting. They do the numbers on income, expense, assets, and liabilities.

The  lender is sure to see they are "having problems paying the bills and house payments."I don't believe they are going show that they can get 100% finance AND be able to carry the current house.

They could give it a try, but I'm sure any lender will deny them. If it is approved(which I doubt) then the lender is taking the risk on the current house and they'll be next in line after the current lender is left holding the bag on the current home.

Besides, I don't believe one can borrow one's way out of trouble. It only delays the inevitable. They may be able to "buy" time. But, it will only borrowed time and cost them more. It may be better to let things run their course and chalk it up to lesson learned.

If they aren't willing to move, yet. They could try to improve the income situation. Get second and third jobs. Reduce other expenses. Pay off highest interest debt like no one's business.

Either way, get financially strong!!!!

If they are behind on this house payment, how are they going to qualify for a new home loan for another house?

If they can get a lease on the home thay may be able to get a 2nd home

They will assume more debt,likely at relatively high interest rates like the loan the currently hold. They face the risk of a tenant not paying.  The mistake many landlords make is focusing on "positive cash flow", they don't consider overall costs and risks associated with them. "Positive cash flow" is a game easily manipulated by terms of the mortgage agreement. It doesn't make it a good deal.

If one has to rely on "creative" and complex measures, there is ultimately a huge price to pay. That's what got them in the trouble in the first place.

If they are upside down in present home, that would mean they have no equity.  Most banks require some sort of solid collateral for a loan.  What collateral could they possibly offer on a house where they owe more than market value and on which they are past due making payments.  Something just does not add up here.

Would the second mortgage become due upon sale of the house?

Isnt a mortgage lien placed on the house when a loan on the house is granted to insure collateral?

There would be no clear title without the second being paid as the bank has no recource against the loan.

I don't think they'll ever get the "opportunity" to find out about holdng two titles and later short selling one. For their sakes, I hope they don't. I highly debt they will get approved on a second loan on a second title. Your friends may not like this, but it truly is to their benefit.

They aren't the only ones attempting to be creative to help themselves, I believe lenders will be extra cautious and scrutinize even more. I don't see it passing muster. They'll have to be financially strong, so they might as well do what it takes to get financially strong.(2nd, 3rd jobs payoff highest interest debt, eventually pay off ALL debt.) This way they'll be in a better position no matter what.

First things first...in order to even attempt to qualify for a short sale, you must have a contract on your house already. You have to have a potential buyer to approve for a short sale.

In order to get approved for a short sale, you have to file a letter of hardship with your mortgage company. Based on that letter, they can deny your short sale. If you are applying for a second mortgage, it may seem to them that you aren't facing any current hardships.

Also, a short sale is not much different from a foreclosure. The only difference is a couple of points off your credit score. I completed a short sale on a house in another state in November of last year and I still cannot get qualified for a decent house. Most mortgage companies aren't willing to give you a new loan if you, for a lack of better words, defaulted on your previous loan.

I agree with LeonPotter...get another job and start paying off some bills. In the economic slump that we are in, the only answer is to do what you can with what you have got. If that means your friends need to sit down and prioritize their spending for the sake of their house, they just may need to do that. 

On a positive note, most mortgage companies are willing to complete a short sale, rather than a foreclosure, simply because the house will not be their responsibility...once you have a short sale approved, the new buyer takes over almost immediately.