Understanding the basics of foreclosure is perhaps best explained by describing the difference between the foreclosure process and a foreclosure alternative. The foreclosure process and foreclosure alternative processes?like loan modifications or short sales?are independent processes. Foreclosure is a legal process where banks remove the homeowner´s right to redeem their mortgage due to their inability to continue making mortgage payments. Foreclosure is initiated by the bank when homeowners miss their mortgage payments. If the homeowner is unable to bring the mortgage current, the property will be sold at their county´s public auction and the homeowner will be evicted. If you are in default on your mortgage payments the foreclosure process will inevitably be initiated by your bank.

Foreclosure alternatives, like loan modifications and short sales, were created to offset banks´ monetary losses resulting from foreclosure. The Mortgage Bankers Association reports losses in excess of $50,000 to banks on each foreclosed home, or as much as 30 to 60 percent of the outstanding loan balance. Banks are able to save significant amounts of money if they work with homeowners that are willing to participate in a foreclosure alternative. It is important to understand that foreclosure is automatically initiated by the bank when a loan is in default. Foreclosure alternatives must be initiated by the homeowner, not the bank.

Not only does the bank minimize their losses by allowing homeowners to modify their mortgage payments or complete a short sale, but the homeowner also stands to gain financial stability through these alternatives.