Sidney Richardson5-minute read
UPDATED: March 31, 2023
When buying a house, there are many pieces of documentation that you may need to provide your lender and seller with. You may have heard of a preapproval letter, which shows a seller that your lender will provide you with a loan up to a certain amount, but what about a proof of funds letter?
Let’s break down what a proof of funds letter is, how to get one and when you might need one during the process of buying a house.
A proof of funds letter (POF) is a document that proves you as a home buyer can cover all the costs of purchasing a home. It essentially shows your seller how much money you have available.
A proof of funds letter is often required in all-cash real estate transactions to prove that the buyer has the cash available to execute the sale. These letters may also be required or recommended for buyers taking part in a short sale.
Bank statements, certified financial statements, proof of an open line of credit or a simple letter from your bank that states that the buyer has the necessary funds are typically sufficient as proof of funds.
If you are embarking on the journey of buying a house, you might 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 to help you not only get a good idea of what you can afford, but also to make your eventual offers on homes stronger and backed up by evidence of your funds.
Getting a preapproval letter and a proof of funds letter are not the same thing. While both of these letters can help verify that you have the financial ability to follow through on an offer when buying a house, they serve two separate purposes. A proof of funds letter tells your seller the amount of money that you have to verify you can make an offer, a down payment or handle another large home-related cost. A preapproval letter, on the other hand, verifies that your lender will give you a loan for a certain amount of money in order to buy a house.
To get your proof of funds letter, you can simply request it from your bank or whatever financial institution is holding your money. To get preapproved, there might be a number of documents involved that you’ll need to show a lender, including proof of income, your credit score, etc.
A proof of funds letter is a valuable asset during the home buying process – whether you’re applying for a mortgage loan or trying to make an all-cash offer. Getting a proof of funds letter shows sellers that you’re serious about your offer and have the money to back it up. It can also show a lender that you have the means to take on a loan. As an 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 is a good way to show your lender that you have the money to make payments. Some sellers may also request to see a POF letter to make sure you have the funds to afford a down payment and closing costs.
Even if you aren’t getting a short-term loan or making a cash offer, a POF letter is useful to obtain for a lot of the same reasons you would get preapproved: it demonstrates that you can pay for a property on closing day and will be able to handle a mortgage.
A real estate agent might ask to see a POF letter before agreeing to work with you to help understand your budget, though you usually won’t need a letter until you’re ready to make an offer on a property. Beyond that, POF letters are often used when buying homes with cash to prove the buyer has the funds to make an all-cash offer. Some sellers may also request to see proof of funds letters to prove potential buyers have the money for a down payment and closing costs, as we mentioned earlier.
A POF letter could, in some cases, make the difference in getting your offer accepted in a seller’s market – particularly during a bidding war. Just like a letter of preapproval, a POF letter adds legitimacy to your offer and could make it stand out among others.
When you request a proof of funds letter, it should contain a few main things, including:
Beyond these basic requirements, there may be different things required based on what kind of loan you’re applying for and what kind of property you’re buying.
As a home buyer, sellers will likely need to see a proof of funds letter from you in order to “hold” the house for you before closing. Since there isn’t a guarantee that the transaction will go off without a hitch, the POF letter provides some reassurance to the seller that the deal won’t fall through once they take the house off the market.
For your real estate agent or your seller, acceptable proof of funds could be as easy as showing a copy of a recent online bank statement.
Be sure to blank out all personal information before showing actual account information to sellers or agents.
As an investor, an actual letter from a bank may be preferable to a bank statement when providing lenders and sellers with proof of funds. It could potentially be required documentation if you’re bidding at an auction or similar sale.
A POF letter should affirm that the buyer has the cash or line of credit needed to do a particular transaction and provide a contact that can verify the information in the letter. The letter must also be dated within the past 30 days.
If you need more than a bank statement as proof of funds and want to get an actual POF letter, typically all you need to do is visit your bank or financial institution and ask for the letter. Your bank can typically get back to you with a letter in a week or less.
A proof of funds letter is an essential document that can prove to a real estate agent, lender or seller that you have the money you say you have and can complete a home transaction. While an actual letter won’t always be required and often a bank statement will suffice, a letter can strengthen your offer and potentially be a huge help in a competitive market or cash-only sale.
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