The first course of action is to sit down with your husband and agree to always stay calm, conduct further discussions in a civil manner, do not argue, do not raise your voice, do not become animated, and above all do not place blame. No doubt you’ve already engaged in heated discussions and ended feeling frustrated, scared, perhaps angry. Your family unit is the most important thing and issues like this are how cracks in the foundation of marriage start. The second order of business is to set a time limit (1 week at the most) and to select the decision maker. If you can’t agree on the decision maker, flip a coin. Once the decision is made, both must support it 100% and move forward aggressively. To help with the decision, you might consider reconstructing your post in the form of a Pugh Matrix. If you’re not familiar, you can google around and find out – fairly useful decision making tool based on a scoring system that takes out emotions, personal preferences while folding in your unique family priorities.
I wouldn’t waste time with a loan mod. You obviously will not qualify given your income level and lack of debt. The Phoenix/Tempe area has little intrinsic appeal and essentially tagged along for the bubble ride meaning no recovery and continued negative cash flow for the forseeable future (5+yrs) if you keep it. It won’t take long to catch up to the 40K potential loss. The short sale option is worth exploring if you can tolerate the bank dragging it out, but it sounds like you’re tired of the game and want to move on. If you pursue the short, don’t worry about the morality aspect of it (ie stiffing taxpayers). It’s perfectly legal and the topic of “Morality and the Law” has been debated every which way since the time of Plato with really no right or wrong answers.
My instinct is to sell the condo, take the loss, and move on. This will immediately reestablish and stabilize your financial baseline and allow you to decisively plan for the future, whether it’s having another child or buy another house. Lastly, try to shed any feelings of entitlement to the 80K you made or the 40K you might lose. No doubt you work hard for your money, but the bitterness will eat you alive and your family will notice it. You folks have a decent income and will survive this regardless of which course you take.
