Evelia Castrejon moved to Utah 13 years ago from her native Mexico in hope of finding her American dream, which included owning a home.

She bought a house, but her dream became such a financial nightmare that she was forced into a desperate situation, owing more money than the home was worth.

Castrejon is among a growing number of people in Utah and across the nation who have found themselves owing more on their home than the property's current market value. She is in the process of "short-selling" her home.

In a real-estate short sale, a lender allows a customer to sell a home at fair-market value and pay off the loan for less than the amount owed on the loan, said David Knight with Wells Fargo Home Mortgage. Restrictions associated with this option include not selling the home to family or friends.

When a short sale is completed, it is reflected as "paid in full for less than full balance" on the customer's credit reports, Knight said. In today's market, lenders would typically require the borrower to pay off the deficiency over time, rather than just forgiving the loss.

But for homeowners, the advantages include avoidance of having a foreclosure on their credit history and the partial control of the monetary deficiency. Also, a short sale is usually faster and less expensive than a foreclosure.

Banks often choose to allow a short sale if they believe that it will result in a smaller financial loss than a foreclosure, Knight said.

The number of real-estate short sales has surged in Utah in recent months. Salt Lake Board of Realtors spokesman Dave Anderton said that about 6 percent of the board's active listings and under-contract properties — a total of about 10,000 properties — is now made up of short sales.

But the increase in short sales and foreclosures has contributed to the decrease in home prices along the Wasatch Front and the rest of the state, he said.

Home-sales numbers released by the board in July showed that 61 of 81 ZIP codes in four Wasatch Front counties saw decreases in median home prices during the second quarter of 2008, compared with the same period last year.

Meanwhile, foreclosures have skyrocketed in Utah in recent months. Jim Wood, director of the University of Utah's Bureau of Business and Economic Research, said Utah's foreclosure rate of about 1.5 percent is not on the scale of other troubled states across the nation, but the Utah rate could hit 3 percent over the next year. He characterized the current financial markets and housing situation as "chaos" of historic proportions.

"We've never seen anything like this," he said. "This is really unprecedented."

The number of Utah homeowners who received a foreclosure filing jumped 22 percent in the second quarter of 2008, compared with the first three months of the year, according to RealtyTrac, a real-estate market analysis firm. Utah had the 12th-highest foreclosure rate in the nation in August, the most recent month for which figures are available. The state had 1,611 foreclosure filings in August, a rate of one foreclosure filing for every 559 households, and an 85 percent increase from the same month a year earlier.

Real-estate experts say many homeowners facing the possibility of foreclosure choose a short sale because it has less impact on their credit rating. A short sale would affect a person's credit rating for up to three years, while a foreclosure would loom for more than twice that long.

Banks changing terms

Castrejon and her husband bought their two-bedroom house in Salt Lake City's Rose Park neighborhood in September 2007 for $129,000, hoping it would be a safe place to raise their two children.

But unbeknownst to the Castrejons, the home was infested with insects, worms and mice that hid inside crevices in the foundation. In addition, the house had structural problems from rotting wood that made the house unlivable.

Results of the home inspection that would have informed the family about all of the safety and health issues in advance were not returned until the day of closing. The couple eventually stopped making payments on the house and moved out just three months after they had bought it.

Lilian Hernandez, a loan counselor with NeighborWorks Salt Lake, is now assisting the family through the short-sale process. NeighborWorks is a nonprofit housing agency that provides free counseling and education to families in Salt Lake City.

She said that the family also felt pressured by the Realtor they hired, who told them they would lose their downpayment if they backed out of the deal.

Speaking through Hernandez as a translator, Castrejon said her family now lives with her brother while they try to resolve the short-sale situation.

"She feels that it's a big impact on their credit, but at the same time, it's better than to continue with this nightmare where they are accumulating all of this debt and not being able to see the light at the end of the tunnel," Hernandez said.

Hernandez said the family has received two offers on the home of $85,000 and $90,000, but neither one was accepted by the lender. She said the home would hopefully be sold within the next month or two.

As the number of short sales increases, some real-estate professionals are inadvertently becoming experts in the process.

"I've never seen this many short sales, and I've been doing them for 11 years," said Mindy Mason, a Realtor with Prudential Utah Real Estate.

Mason said in years past, banks would often accept the loss on a property and forgive the deficiency from the seller, but times have changed.

"A lot of banks are requiring that the deficiency be paid over time or at least a portion of it be paid," she said. "They used to forgive, but there's just so much of it."

Mason said a "huge amount" of investor speculation, subprime lending and home construction contributed to the dramatic inflation of home prices and put many buyers in homes they eventually were unable to afford when the market turned downward.

She said those factors put a significant number of property owners in financial peril, so much so that today, about half her business involves short sales.

Quick action urged

Eric, who asked that his last name not be disclosed, found himself unable to afford his home and ended up turning to a short sale. He and his wife purchased a new home in Orem in 2005 and lived there for three years before separating.

"I couldn't afford the payments on my own," he said.

The couple bought the house for $480,000, and it jumped in value just two years later. He refinanced the home after it was appraised for $619,000 to finish the basement.

His choices were to "short-sell" the house or risk losing it to foreclosure. He said he chose the short-sale option rather than allowing the house to go into foreclosure because the long-term impact on his credit would have been much worse with a foreclosure.

He eventually sold the house for the original purchase price in February of this year, although the mortgage was for the higher, refinanced amount. "The note on it was $619,000, and then it sold for $480,000," he said.

With delinquency so pervasive in the current mortgage market, lenders warn borrowers to take immediate action to avoid losing their homes.

Knight said if homeowners finds themselves in dire financial straits with their mortgage, they should contact their lender as soon as possible to explain the situation. He said the loan servicer would begin to examine all options in an attempt to keep the homeowner in the property. But if that proves unfeasible, then other alternatives would be considered, including short-selling.

Knight said a bank would look at the current value of the home to determine what a reasonable sales price would be for the property. "We will help them list it appropriately for the market," he said.

Short sales typically take some time to complete, due to the extensive paperwork involved and approvals needed, he said. The timeline for a short sale would be approximately 35 to 40 business days before the bank would make a decision.