What is Arm's-Length Transaction?
An arm's-length transaction is a sale between a buyer and seller who are unrelated and acting in their own independent interest, with no secret side deals. Lenders require short sales to be arm's-length to prevent fraud — for example, a homeowner selling cheaply to a relative who lets them stay. Both parties usually sign an affidavit confirming this.
Example: To approve the short sale, the lender requires an arm's-length affidavit confirming the buyer isn't a relative or business partner of the seller and there are no hidden agreements.