Loan Modification, Refinance or Sink???

[Mike]

Hi, I purchased my home in a SW suburb of Dallas 5 years ago in August. I purchased my home for $130K at 8.625%, conventional, fixed-rate for 30 years. I had an unscrupulous mortgage broker who lied to me and my Realtor about the terms of the loan until closing. We had been told 2 yr prepayment penalty, but it was 5 years. (No wonder he didn't show for the closing?) I had rented the home and had already taken possession prior to closing (due to problems with the broker), so I couldn't see backing out of the deal at the escrow officer's desk. I am disabled and on a fixed income. My household income has gone down twice (divorce and one child leaving my home) in the past two years to the tune of 40%. I tried to get Countrywide to refinance and waive the prepayment penalty, but they claimed they couldn't because my mortgage is owned by America's Best Wholesale Lender (one of their subsidiaries). I fell behind in taxes because my ex-husband couldn't afford to pay his portion as ordered by the court, and he couldn't afford his portion of the kid's medical bills either (so I was late with one quarterly payment.) Countrywide did a tax audit and put me on an escrow as of January of this year. I am borrowing Peter to pay Paul, leveraging living expenses with an Amex card, and so far I have managed to keep my mortgage payments on time, but this is catching up with me. I have a workout with my CU for two loans until August, I put my 1st grader in public school, and I am doing everything I can to cut costs. I called Countrywide a couple of weeks ago to request a loan modification. They tell me that I can't qualify without skipping a payment. I am worried that this will really hurt my credit. The rep also claimed that there is some way this is reported to the credit bureau that would not be derogatory, but I don't trust them. I have heard that sometimes loan modifications can be granted before your credit hits the skids as long as your income and expenses show a deficit. I looked at selling the house in August when the prepayment penalty is over, and moving into a cheaper home. I was told that I'd have to sell my house first because banks aren't taking contingent contracts anymore. I was also told by a prominent Realtor in my area that my house will not sell for what I owe on it plus commission, due to the foreclosures in the area. She pulled comps in my subdivision which put my house at $121,000, and I owe $123,000. Two recent sales were foreclosures at about $60,000--- but one of those homes didn't even have complete plumbing in it. I have asked for advice from an appraisers forum to find out whether these foreclosures will completely knock me out of the park if I try to get a no-cost FHA refinance at a lower interest rate. The consensus is that the foreclosures aren't really comparable sales, especially since my home has been completely updated and has an addition (most homes in my subdivision are not as large or as modern.) There are two other subdivisions across the street (within a radius of 5 city blocks) with houses built within a year or two of mine that are about the same size, and sales prices look better there. My credit scores are in the high 600s. Please advise what you think my best course of action is.