If someone lets their home go into foreclosure, there is a big chance that not only will they have a foreclosure on their credit record but that the lender will also obtain a deficiency judgment. For example, if the lender is owed a total of $250,000 and the foreclosure auction brings a bid of $175,000, the deficiency judgment puts the the borrower is on the hook for the difference.
From the lender’s perspective, it’s probably true that they don’t want to incur the expense of foreclosure — who knows whether they would ever be able to collect on a deficiency judgment. At the same time, however, on top of having a foreclosure on your credit record, a deficiency judgment would probably be big enough so that the only way to get rid of it would be through bankruptcy — leaving you with a double-whammy on your credit.
In any event, by asking you to try a short sale, your lender is asking you to share some of the burden before letting you off the hook for the difference between what the property is worth and what you owe. On the one hand, you could refuse to go through the short-sale process and the lender would end up with increased expenses and you would end up with a foreclosure and possibly a significant deficiency judgment — definitely a lose-lose situation.
On the other hand, you could cooperate with your lender in trying a short-sale. If the short-sale is successful, you’re off the hook, and the lender doesn’t have another property to deal with. Even if the property doesn’t sell and the lender ends up agreeing to a deed-in-lieu, both sides are better off than they are with a foreclosure.