I think the language below which is usually contained in an arms length transaction say's it all. The transaction should be between 2 unrelated parties and should not share a business interest of any kind.
""No party to this contract is a family member, business associate, or shares a business interest with the mortgagee (you, seller, homeowner, anyone whose name is on the loan). Further, there are no hidden terms or special understandings between the buyer or seller or their agents or Mortgagee.(Like money, kickbacks, gifts and/or arrangements to move back in or stay in the property in any capacity including putting your kids names on the lease.)
The buyers and sellers nor their Agents have any agreements written or implied (spoken or hinted, a wink or a promise) that will allow the Seller to remain in the property as renters (you must move, your whole family must move, you must move everything and not move back, Eever) or regain ownership of said property (you cannot buy it back later from whomever purchases it, go on title and/or live there ever), at any time after execution of this short sale transaction. None of the parties shall receive any proceeds from this transaction except the sales commission. (Buyers cannot receive credits, kickbacks or any funds from any party to the transaction unless written in as part of the contract, and approved by the short sale lender in their condition letter. Sellers cannot receive credits, kickbacks or any funds, gifts, gift cards, or any funds from any party to the transaction unless approved by the lender in writing as part of the contract and short sale lender condition letter, no matter what).""
But to just answer your question, it is a document used to prevent the seller from selling to a friend or relative. In a short sale the seller cannot profit from the short sale of their property. If the seller of a short sale sells to someone they know, they could receive some form of profit and that could be considered mortgage fraud.
Best of luck!
An Arm's Length Affidavit is a document that is signed by the buyer the seller and each of the agents stating that the buyer and the seller are not related in any way (relative or business associate). The bank doesn't want you to buy the property and then sell it back to the seller.
Hope this helps!
United Realty Group