I am very sorry to hear of your situation. I'M NOT A LAWYER OR TAX professional, nor am I aware of ALL the details of your circumstances; however, here's my opinion:
Your current LTV appears to remove a loan mod as an alternative. The success level of the Loan Modification program has been pretty poor in my opinion, only allowing 105% LTV (note that the Federal government is coming out with 125% LTV Fannie & Freddie loans for this program). As of the end of June 09, HUD states that â€œSince the administration announced Making Home Affordable Feb. 18, more than 200,000 borrowers have received offers for trial loan modifications, tens of thousands of refinances and trial modifications have gotten under way and more than one million potentially eligible borrowers have been sent informational mailings.â€ Considering the depth of the problem, this does not give one a â€œwarm and fuzzyâ€ feeling does it?
If you want to view Loan Mod guidelines see:
If you really absolutely canâ€™t afford to stay in your home a Short Sale would be better for you from a credit perspective. Credit bureaus put short sales in a different scoring bucket than foreclosures when generating a score. The foreclosure bucket is dealt with more severely in that it takes longer to recoup the points lost by the event.
Besides the scoring by the credit bureaus, lenders (read Fannie & Freddie) allow a return to the best rate pricing sooner with a short sale (2 years) than with a foreclosure (3 years for FHA & 5 years for non-FHA). For a Short Sale the Credit score hit ranges 80-200 points from best case to worst case with short sales. Figure itâ€™s closer to 200 points with a foreclosure.
While its true that your credit report will take a hit, your score will be negatively affected for 2 years after the foreclosure and it will show in the "derogatory" section of the credit report 7 to 10 years. Subject to change, lenders will also not lend to anyone who has had a foreclosure/short sale within 3 years.
Finally, the forgiveness of debt (cancellation of debt) is treated as ordinary income by the IRS despite the fact that the borrower has received no cash at the time of a short sale or foreclosure. However, if the cancelled debt amount is considered "qualified principal residence indebtedness" pursuant to the Mortgage Forgiveness Debt Relief Act of 2007, which lasts until 2012, there will be no taxation on this forgiveness of debt.
In any case, no matter what anyone posts on this subject, your situation should absolutely be reviewed by a RE Lawyer AND Tax professional.