Most people who are ready to buy a home start by getting mortgage preapproval to ensure they can borrow enough money. However, you also will need cash for out-of-pocket expenses, such as the down payment and closing costs. You show sellers you can afford those costs by providing a proof of funds letter from your bank or financial institution.
Read more to learn what financial assets are — and are not — eligible for a proof of funds letter to buy a home, and how you go about getting one.
- A proof of funds letter, also known as a POF letter, shows how much cash and other liquid assets you have to afford the down payment and closing costs on a home.
- Proof of funds letters are essential if you’re making an all-cash offer to prove to sellers you’re able to buy the home.
- You can obtain a proof of funds letter fairly easily from your bank or financial institution.
A proof of funds letter is a document from a bank or financial institution that verifies the funds available in a specific account.
When you’re buying a home, a proof of funds letter shows the seller you have enough cash available to afford the down payment and closing costs required to complete the sale. This letter protects the seller from accepting an offer from a buyer who can’t afford to buy the home.
“A proof of funds letter is a document that verifies an individual’s ability to make a cash purchase,” says Adie Kriegstein, founder of the NYC Experience Team at Compass in New York City. “In other words, it serves as evidence that the funds required to complete a transaction are readily available and exist.”
Bank statements, investment account statements, and letters issued by your bank all can qualify as proof of funds. Basically, you need documentation from your financial institution proving that you have the available funds.
If you don’t have such documents on hand, the institution holding your funds typically will provide a letter verifying your balance on request.
Some people may assume that mortgage preapproval is enough for most sellers, but a proof funds letter and a mortgage preapproval letter are different documents.
A preapproval letter shows that a mortgage lender expects to approve you for a loan sufficient to buy the property.
A proof of funds letter shows how much cash you have available for a down payment and to pay the closing costs needed to finalize the sale.
Typically, only liquid assets qualify for a proof of funds letter. A liquid asset consists of cash or is readily convertible to cash.
Examples of liquid assets include: the balances of your savings and checking accounts, and your balances in investments such as money market accounts, bonds, stocks, and certificates of deposit.
Illiquid assets include: real estate, which must be sold to get cash out; collectibles, where the value may be highly subjective; artwork; jewelry; and private equity, which may take time to convert to cash.
What Assets Are Eligible for a Proof of Funds Letter?
|Eligible Assets||Ineligible Assets|
|Checking and savings accounts.||Collectibles.|
|Mutual funds.||Life insurance policies.|
|Bonds.||Employee or company stocks.|
|Money market accounts.|
|Certificates of deposit.|
|Retirement accounts, such as a 401(k).|
There are many different reasons why someone might need a proof of funds letter.
“Investors might be asked to provide this letter to prove they have the financial capacity for business deals or investments,” says Alex Shekhtman, CEO and founder at LBC Mortgage in Beverly Hills, California.
Homebuyers — first-time homebuyers in particular — often need to provide a proof of funds letter to show they have enough money for the down payment and closing costs.
Here are two primary reasons why you may need a proof of funds letter in real estate:
- Cash offers. The main reason most buyers need a proof of funds letter is when they’re making an all-cash offer on a property. “In this instance, the letter would be required by the seller for them to consider the buyer’s offer, as it ensures that the buyer has the financial means to complete the transaction,” Kriegstein says.
- Short sales. Banks have strict rules regarding short sales, which are homes being sold so the owners can avoid foreclosure. Providing a proof of funds letter may be part of the requirements.
A proof of funds letter is fairly simple to get. Your bank will have its own process for providing a letter to you. Talk to your mortgage lender as early in the homebuying process as you can, so you know what its requirements are and you can have the letter ready when it’s needed.
Here are general steps you can expect to take to get a proof of funds letter:
- Consolidate your funds. The first thing you need to do is ensure you have the funds available in cash or in a liquid account, Kriegstein says. If you have the money spread across different assets, you may need to transfer the funds into a single account. Consolidating the funds is simpler and makes it less likely that the seller will turn down your offer.
- Request a proof of funds letter. Once you have the funds in one place, you’ll request a letter from your bank or financial institution confirming your balance. “Make sure to let the bank know why you need the letter, so they can customize it to fit your needs,” Shekhtman says.
- Receive the letter. Your bank will verify your account balance, write the proof of funds letter, and send it to you. Once you receive the letter, take a moment to double-check all the details and ensure everything is accurate. Make sure your contact information is correct, so the seller can get in touch with you easily.
- Submit the proof of funds letter. When you’re ready to make an offer, you or your real estate agent will send the letter along with your offer details to the seller or their listing agent. Keep in mind that your proof of funds letter contains sensitive financial information, so you shouldn’t give it to anyone who isn’t involved in the home sale. Contact a real estate attorney if you aren’t sure whether the person requesting a proof of funds letter from you really needs it.
You’ll need to obtain a proof of funds letter before making an offer on a home — especially in a competitive real estate market.
When you are ready to bid on a home, it’s a good idea when you make an offer to include the proof of funds letter. However, it’s acceptable to provide proof of funds within 24 to 48 hours of submitting your offer.
If you wait until you’ve already made an offer to request proof of funds, the process at best could be delayed. In the worst-case scenario, you could lose out on the home to another buyer.
There are no specific formatting requirements for a proof of funds letter — you just need to ensure the document contains all the necessary information.
A proof of funds letter usually includes important details like your name, your account number, your current balance, and the date the letter was issued, Shekhtman says.
The letter should be on the bank’s letterhead, and have an authorized bank official’s signature at the bottom.
Here’s an example of a typical proof of funds letter:
This letter certifies that [buyer’s name] is a client of our bank and remains in good standing. [Buyer’s name] has a total combined cash balance of $[amount]. We have attached copies of the statements for each of [buyer’s name]’s accounts.
If you need further assistance, please do not hesitate to contact us directly at [phone number].
[Name and title of bank representative]
Here are answers to some common questions about proof of funds letters in real estate.
You can submit an offer without a proof of funds letter, but the seller may ask to see one before accepting. And if you’re bidding in a seller’s market, submitting an offer without a proof of funds letter makes your offer less competitive.
There’s no definitive timeline for how long proof of funds in real estate is valid, but the document is meant to show how much money you have available on the date it’s issued. The more recent your proof of funds letter is, the more useful it will be. And if your financial situation changes, you’ll need to request a new proof of funds letter.
How long it takes to verify funds depends on whether you’ve consolidated your funds. If the money is in one account, your bank may be able to verify funds and provide you a proof of funds letter within a day. If you have to transfer funds from another account, it may take longer.
When you’re in the market to buy a home, it’s essential to have the right documentation. So, before making an offer on a home, you should be ready to provide a proof of funds letter. This letter proves you can cover the down payment and closing costs, and could strengthen your offer with the seller. Fortunately, a proof of funds letter is easy to obtain, and your bank should be able to walk you through this process.
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