A Proof of Funds Letter: A Complete Guide
A typical home buying process involves looking for the right property, getting financing, making an irresistible offer, inspecting the home, and closing the deal. It’s not a done deal until you present the required paperwork.
In most cases, you will provide the relevant documentation at the closing. There are, however, other documents you need to provide even before the seller agrees to your terms. One such document is a proof of funds letter.
Is your dream house close to being a reality? Have you saved enough money to close the deal? Then you need to get a proof of funds letter when negotiating your home purchase.
It will not only show your ability to buy the property but also prove you have legal access to the funds. As a real estate investor or a home buyer, here is all you need to know about a proof of funds letter.
What is a Proof of Funds (POF) Letter?
This is an attestation that you have sufficient funds or liquid assets to buy a property. You can get it from your bank or any financial institution.
A Seller will need a proof of funds letter to guarantee that the sale will happen before taking their home off the market. For the lender, it is evidence that you can afford the down payment and closing costs.
What Types of Assets Qualify as Proof of Funds?
There are some assets that are ineligible as proof of funds. Which money can you use to demonstrate your financial capability? Cash is definitely the first option. Also, think of any assets that can easily be liquidated.
The funds could either be in a bank account or a money account. If your closing funds are in different accounts, you can provide multiple statements as your proof of funds. In some circumstances, they may accept a line of credit as proof of funds.
However, some assets can’t be used as proof of funds. These include shares or bonds, valuable possessions, life insurance, and mutual funds. In a case where you want to use them as proof of funds, you must first liquidate them before requesting an official letter.
Why Require a Proof of Funds Letter?
During your home buying process, there are some instances where a proof of funds letter is unquestionably necessary. They include:
#1: Cash Down Payment
Your offer will be more credible if the seller sees your ability to pay the down payment out of cash rather than relying on credit or a loan.
#2: Lender Requirements
To purchase a home with a loan, you need a pre-approval letter. You may also need a letter of proof of funds to show the lender that you have enough money to fund the rest of the purchase.
#3: Cash Offer
You can’t just tell a seller you have enough cash to purchase their house. You must provide documentary evidence to back up your statement and interest in acquiring the property. The seller will be sure your offer is legitimate and reserve the home for you until the closing date.
When Do You Submit Proof of Funds Letter?
If you plan to negotiate an offer to purchase a property, you should have the proof of funds letter ready. This way, if you find the right house, you will produce it while making your offer.
The letter will give you an edge over other buyers for the property. You can, however, present the letter 24 to 48 hours after making your offer.
How to Acquire a Proof of Funds Letter?
Getting a proof of funds letter is fairly easy. Prepare your accounts and request for the document. Note that it does not have to be a letter at all. It is acceptable to use a bank statement or a brokerage account that shows an adequate cash balance to make the purchase.
Get a proof of funds letter if you feel uncomfortable giving a stranger your bank statement. You can easily obtain your POF letter by following these steps:
1. Consolidate Your Funds
Streamline your finances by transferring all of your funds to one account. It is not a requirement. However, it will improve your credibility with the seller. Also, with multiple accounts, the verification process may take longer than expected.
2. Contact your Bank to Request for the Letter
Once your account has been set up, get in touch with your financial institution and ask for the letter. Usually, it takes one to two days to get the document.
When you have transfers and deposits yet to be processed, it may take longer. For that reason, it is advisable to request the POF letter a week or more prior to using it. Review the letter to ensure all the information provided is accurate.
3. Safeguard your Document
A proof of funds letter contains sensitive and important financial information. You must be careful when handling it. Make sure it lands in the hands of trusted individuals you have scrutinized. You don’t want to get involved in a financial scam planned by con artists.
What Should a Proof of Funds Letter Include?
A proof of funds letter is a bank’s confirmation that you have the funds to complete a transaction. For the letter to be legitimate, it should include the following identifying details:
- The bank should print it on an official bank paper with its letterhead clearly showing its name and address.
- The statement date
- An official bank statement about the account holder
- Account details: That is the type of account and the account balance
- Signature of an official representative of the bank or notary
- A copy of an online bank statement
Comparison between a Pre-approval and Proof of Funds Letter
A pre-approval and a proof of funds letters are both issued to seller when making an offer. They show that you have sufficient funding to continue with the buying process. These documents, however, contain different information and cannot be used interchangeably.
A proof of funds letter confirms that you have the money for the down payment and closing costs. In contrast, a lender issues a pre-approval letter showing that, after scrutinizing your financial information, they will give you a mortgage loan to complete the rest of the purchase.
The process of obtaining the documents is also different. It is easy to get proof of funds letter. A certified bank statement is enough to show availability of funds.
But with the pre-approval letter, the application is thorough. You need to provide detailed information on your income, assets, debts, and employment history.
Buying a home can be a tedious process. It involves huge financial transactions. While a proof funds letter may make the process more comprehensive, it is a straightforward document to acquire. Get it early enough before negotiating and making an offer. Ensure that the information it contains is accurate. Keep the letter secure to avoid financial fraud. It will not only show that you are liquid enough to purchase a property, but it will also make you stand out among other buyers.
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