The seller must complete a hardship letter and provide documentation showing their current financial status (tax returns, bank accounts, income, debts, assets, etc.) -- it's very similar to what a lender would require if you were buying a home. The package also includes a copy of the accepted offer and usually a net sheet showing the lender exactly how much they'll receive when escrow closes. The short sale lender reviews the package and obtains price opinions from other real estate professionals/appraisers to make sure that the property is being sold at a realistic price. After reviewing everything, the lender decides whether a short sale makes more sense than foreclosing.
Most short sale lenders do not want the sellers or their agent sending papers over piecemeal; they'd rather get everything all at the same time -- and not until an offer is accepted. So when you see a comment saying that "lender has received short sale package" or something like that, it often means that a previous offer was presented, but by the time the lender responded (it often takes 4-6-8+ weeks) the original buyer probably lost interest.
When that happens, since the short sale lender has already received and reviewed the buyer's package, it gives the seller and their agent a much better indication of whether or not (and on what terms) the short sale will be approved. So it can often mean a quicker response and less uncertainty for the next buyer.
- Rod Herman
On another note a shortsale is not for the impatient or faint of heart.