In this situation, then the lender will see that they will have to liquidate the property one way or another. If they conclude that a sale of the property is inevitable and that a short sale will be the best way to cut their losses, then they will approve the short sale. We have also seen lenders approve short sales even if someone's hardship didn't put them in a position where they couldn't make their payments. But, the person must move and is unwilling to accept a deficiency payment for their upside down home. A good example of this is a credit worthy person with a stable, solid income who has a job transfer. That person is upside down and unwilling to repay the lender for the loss. The lender knows from past experience that going thru the foreclosure process and then trying to collect from the borrower is hopeless.
First, the foreclosure process will take longer than a short sale and cause them to lose even more money. Second, they know that the borrower has the option to declare bankruptcy and use other actions to avoid paying the lender. Third, many states do not allow the lender to pursue a borrower for the loss after a foreclosure. So, they lose money on a foreclosure that takes a long time and get zero from the borrower. Based on their prior experience they know that a short sale will be their best option to reduce their losses as much as possible.