What is a proof of funds letter and when do you need it?

When buying a house, there are many pieces of documentation you may need to provide your lender and the seller. You may have heard of a preapproval letter. It’s proof to a seller that your lender is willing to provide you with a loan up to a certain amount. But have you heard of a proof of funds letter?

Let’s break down what a proof of funds letter is, how to get one and when you may need one during the process of buying a house.

What is a proof of funds (POF) letter?

A proof of funds letter (POF) is a document that proves a home buyer can cover all the costs of purchasing a home. It essentially verifies for a seller how much money you have available.

A proof of funds letter is often required in all-cash real estate transactions to prove a buyer has the cash available to execute a sale. A proof of funds letter may also be recommended for buyers purchasing a short sale property.

Bank statements, certified financial statements, proof of an open line of credit or a letter from your bank confirming you have the necessary funds are typically sufficient as proof of funds.

If you’re embarking on the journey of buying a house, you may be asked to produce a POF or preapproval letter fairly early in the process. It’s a good idea to get preapproved and potentially get your hands on a POF letter as early as possible in the home buying process.

The preapproval will help you get a good idea of what you can afford. The proof of funds letter will show sellers how much money you have to buy a home. Together, the documents can make your offers stronger because they’re backed by evidence.

Proof of funds vs. preapproval: What’s the difference?

A preapproval letter and a proof of funds letter serve distinct purposes. Both letters help verify your financial ability to follow through on an offer when buying a house but provide different pieces of information:

• Proof of funds letter: The document shows a seller how much money you have to make an offer, a down payment and the closing costs related to the purchase. You can request a proof of funds letter from your bank or other financial institution where you deposit your money.
• Preapproval letter: The letter states the amount of money your lender is willing to lend you to buy a house. You will need to provide your lender with a lot of financial information to get preapproved, including proof of income, your credit score, etc.

Why is a proof of funds letter necessary to lenders?

Whether you’re applying for a mortgage loan or making an all-cash offer, a proof of funds letter is a valuable asset during the home buying process. While a proof of funds letter shows sellers you’re serious about your offer and have the money to back it up, it shows mortgage lenders you have enough money to repay your home loan.

For example, proof of funds letters are often required for house flippers and other short-term investors working with hard money lenders. If you’re applying for a short-term loan, a POF letter verifies for your lender that you have the money to cover your loan payments. Some sellers may request a POF letter to make sure you have the funds to afford a down payment and closing costs.

A POF letter is useful even if you’re not getting a short-term loan or making a cash offer. It demonstrates that you can pay for the property on closing day.

When do you need a proof of funds letter?

A real estate agent may ask to see a POF letter before agreeing to work with you, but they usually won’t need the letter until you’re ready to make an offer on a property. It’s also important to submit proof of funds for a cash offer to prove a buyer has the funds to complete the real estate transaction. Some sellers may request proof of funds letters to confirm potential buyers have enough money for the down payment and closing costs.

A POF letter can give you an edge in getting your offer accepted in a seller’s market – particularly during a bidding war. Like a preapproval letter, a POF letter adds legitimacy to your offer and can help it stand out.

What qualifies as proof of funds in real estate?

A POF letter should confirm a buyer has enough cash in an account or line of credit and include the name of a bank contact who can verify the information in the letter. Your real estate agent or the seller may accept a copy of a recent online bank statement as proof of funds. Money in retirement accounts, such as 401(k) plans, may not count as proof of funds because the funds aren’t easy to withdraw.

If you’re an investor, a lender or seller may prefer a letter from your bank over a copy of a bank statement. A proof of funds letter may be required if you’re bidding at an auction or a similar type of sale.

Black out all personal information before submitting any account information to sellers or real estate agents. And the letter must be recently dated, no older than 30 days.

What needs to be included in a proof of funds letter?

When you request a proof of funds letter, it should contain some key information, including:

Your bank or financial institution’s name and address and a signature from an authorized employee or notary

• An official bank statement
• The balance of your funds in a checking or savings account
• The date the funds in the account were verified

Beyond the basic requirements, the letter may provide extra information based on the loan you’re applying for and the property you’re buying.

Proof of funds letter template

Here’s an example of what a proof of funds letter template can look like:

[DATE]

[BANK NAME]

[BANK ADDRESS]

[CONTACT EMAIL OR PHONE NUMBER]

Dear [NAME],

This letter is to certify that [BUYER OR COMPANY NAME] has been a client since [YEAR] and has a combined balance of [DOLLAR AMOUNT] in cash deposits with our bank.

The funds are held in [BUYER OR COMPANY NAME’S] accounts. Attached you will find copies of bank account statements for each account.

Feel free to contact us at [CONTACT EMAIL OR PHONE NUMBER] if you require more information or have any questions.

Sincerely,

[SIGNATURE]

[BANK REPRESENTATIVE NAME AND TITLE]

How do I get a proof of funds letter?

If you need more than a bank statement as proof of funds, typically all you need to do is visit your bank or financial institution and ask for a POF letter. A bank can usually provide the letter in a week or less.

The bottom line: A proof of funds letter proves to sellers that a buyer has enough money

A proof of funds letter is an essential document that proves to a real estate agent, lender or seller that you have the money you say you have to complete the real estate transaction. Sometimes, a letter won’t be required, and a bank statement will suffice. But a letter can strengthen your offer and potentially  provide an advantage in a competitive market.

Looking for your dream home? Start the approval process with Rocket Mortgage^® today and prove to buyers that your offers are serious.