As we mentioned, a lender is also negatively affected by a foreclosure. After the cost -- and time expense -- of sending multiple notices and warnings to a delinquent homeowner, the lender faces additional costs as the foreclosure moves into the courts. Legal filings, hearings and the associated documentation all take time and money to prepare. After the foreclosure sale, the lender may sue to recover money that's owed above the amount that a home was sold for in a foreclosure, adding to legal costs. Also, since the lender gains ownership of the property, the lender faces the expenses and dilemmas every homeowner faces when selling a property: If it takes time to sell, it can become a very expensive burden. Even if the sale doesn't stretch on, the lender must still hire a real estate broker to administer the sale of the house [source: Foreclosure.com].
However, in opting for a short sale, the lender can recover a portion of the money that's owed on the property, thus reducing the loss without the extensive legal process of a foreclosure. In many cases, a short sale reduces the lender's total loss to a level where it's more financially savvy for him to write it off, rather than sue the former homeowner [source: Foreclosure.com].