From a lender's perspective, it's better to recover a portion of a mortgage loan than to absorb a total loss. Therefore, in lieu of a foreclosure, banks will often settle for a short sale. This allows both the lender and the homeowner to end up in a better position.
One concern for many homeowners, however, is whether the bank will sue for a deficiency judgment after foreclosure. In an attempt to recover the difference in the amount that was paid and the amount of the loan, the bank can file a lawsuit against the homeowner. A deficiency judgment will appear on a homeowner's credit report and have a negative impact, just as a foreclosure would [source: Experian].
But rather than endure a costly and possibly lengthy litigation process, a bank will often cut its losses with homeowners who are unable to pay their mortgages due to a proven hardship, such as a divorce or loss of income. And the reduced amount of money owed will ease the burden on the homeowners and not irreparably damage their credit.