Well it is the same than $\displaystyle{\frac{x^2}{x}}$.
Is it a $\frac 00$ limit or do we use algebra to simplify this to $x$ and say it is going to $0$ ?
In fact you can manipulate any expression to make it undefined if you want. But we make a postulate that for a function $f$ if after algebric manipulations the new function $\tilde f$ is well defined then we can extend $f$ by continuity to $\tilde f$.
In general we do not detail all of these considerations, we just assume the extension with the maximum domain fo definition.
In our case, we have
$\begin{cases}
\text{on }A=\{x\ge 0,\ y\ge 0,\ x\neq y\} & f(x,y)=\frac{x-y}{\sqrt x-\sqrt y} \\
\text{on }\bar A=\{x\ge 0,\ y\ge 0\} & \tilde f(x,y)=\sqrt x+\sqrt y
\end{cases}$
It is easy to see that :
- $f$ is continuous on $A$ as a composition of continuous functions
- $\tilde f$ is well defined and continuous on $\bar A$
- the restriction to $A$ of $f$ is $\tilde f:\qquad f_{/A}=\tilde f$
So we generally choose to work with $\tilde f$ defined on $\bar A$ instead of $f$ defined on $A$, so as to get rid of the somehow artificial singularity when $x=y$.
Now for the original question : $\tilde f(0,0)=0$ so the limit for $f$ does exists and we can choose to extend $f$ by continuity in this point by setting $f(0,0)=0$.
Edit:
A little more into details about extending by continuity.
The theorem says : if a function $f$ is cauchy-continuous on a domain $A$ then it can be extended in a unique way to a function $\tilde f$ continuous on $\bar A$
For a Cauchy sequence in $A$ we have $f(x_n,y_n)=\tilde f(x_n,y_n)=\sqrt{x_n}+\sqrt{y_n}$ which is still cauchy according to the post forward for $x_n\ge 1$ and $y_n\ge 1$ : $\sqrt{a_n}$ is also cauchy if $a_n\ge 1$ is cauchy
For $[0,1]\times[0,1]$ this is not an issue either since this is a compact on which $\tilde f$ is continuous.
Finally the two remaining bands are out of interest, since $f=\tilde f$ already on these.
Thus $f$ is continuously extentable to $\bar A$ by $\tilde f$.
So it does not matter that it is a single point $x=0$ like in the case $\frac{x^2}{x}$ or a line $x=y$ like in the case of $f(x)$, what's matter is that in the restricted domain of definition the function is Cauchy-continuous (given that $(\mathbb R,|\cdot|)$ is complete, we can always conclude positively that the extension is sound).
Also a Cauchy sequence being bounded (let say inside a compact $K$), what's really important is not the behaviour at infinity but the continuity of the extension near the singularity. We want $\tilde f$ simply continuous over $\bar A\cap K$. ($\tilde f$ is then continuous over a compact, thus uniformly continuous, thus cauchy continuous). It is more constraining than just simple continuity of $f$ over $A$.
For instance the counter example given by Hanul Jeon is the above mentionned post, does not work because $f(x)=1/x,\ a_n=1/n$ then $\tilde f$ would not be continuous in $0$ no matter which value you assign to $\tilde f(0)$.