Mortgage Problems and Solutions

my husband and i bought the house in sep. 2004, since we were not qualified for a mortgage as we had no credit history (we came to the us in 2003 but we had green cards at that time), my sister is the borrower of the house and we are all listed on the deed as grantees (3 of us). the mortgage is 5/1 arm and the rate will be increased starting from oct.09.

we thought about refinance/loan modification to avoid higher rate but my sister currently has (1) a bad credit and (2) the house value is now 15-20% lower than the mortgage. it seems this option is impossible

i & my husband currently have good credit (not excellence) at 690 score and we are both currently employed. i hope we would be qualified for a mortgage approval now. my sister want to take out her name in both deed & mortgage and we really wanted to have the name of the house in both deed & mortgage under our names only because we’ve been paying the mortgage since 2004 till now.

my sister is willing to sign the quitclaim deed that we can go with novation. will lender approve a novation to us? will the lender agrees with principle reduce at a fair market value in the novation because we could not be approved for a mortgage that’s higher the house value, we could not afford for any down payment for the time being.

i do appreciate any of your consultation because i do a lot of research and it’s quite difficult for us to find a solution.

thanks a lot,