Most short sale banks insist that all parties sign an arm's-length affidavit prior to issuing short sale approval.

The reason you are being asked to sign an arms-length affidavit is because banks are trying to put a stop to mortgage fraud. When people get into financial trouble, crooks can smell distress a mile away. These thugs crawl out of the gutters and seem to be constantly cooking up schemes that take advantage of those homeowners who are facing foreclosure.

An arms-length affidavit is a document created by a short sale bank in an attempt to prevent sellers from selling to a relative and to curb mortgage fraud. The reason the bank does not want a seller to transfer title to a relative in a short sale is because sellers cannot profit from a short sale.

What Does an Arms-Length Affidavit Contain?

Most banks create their own arms-length affidavits. Therefore, the language can vary from one affidavit to another. Following are the points contained in a basic arms-length affidavit:

• The arms-length affidavit references the property address, name of the sellers, buyers and agents, and the fact this is an arms-length transaction.

• No party to the short sale contract is a family member, business associate or a person who shares a business interest with the seller.

• There are no hidden terms nor special agreements among the buyers, sellers and / or agents.

• Once the transaction closes, the sellers will not rent back the home nor regain title to it.

• None of the parties will receive any compensation except for the commission paid to the agents.

If you sign an arms-length affidavit on your short sale and then violate it, you could be held liable for mortgage fraud. Mortgage fraud falls under jurisdiction of the F.B.I. Moreover, if anybody tells you that it's OK to sell to a relative, make sure that you clarify your relationship with the buyer to the bank before closing.

By Elizabeth Weintraub, About.com Guide
http://homebuying.about.com/od/shortsale/f/arms-length-affidavit.htm