One of the terms often associated with real estate is “proof of funds.” It is a document that shows that you have the funds to buy a home. Hence, it is necessary to understand how to obtain a proof of funds letter when making a real estate purchase. We’ll show you everything you need to know in this guide.
What Is Proof Of Funds (POF) In Real estate?
In real estate, a Proof of Funds document shows how much money a person or entity has available. When buying a home, you may need a POF to prove to the seller that you can afford the purchase price. Keep in mind that the purchase price can include the down payment, escrow, and closing charges.
Which Funds are Eligible?
POFs can be various different sorts of funds. In some cases, simply having a bank statement from your bank or printed online may be sufficient. A certified financial statement or a copy of a money market account balance will also suffice. You may also require a statement from your bank or financial institution stating the exact amount of accessible or liquid funds that you have available.
It is critical to remember that your funds must be liquid. Mutual funds, life insurance, another person’s bank account, stocks, and bonds, or proof of other possessions do not qualify as POFs.
Why is a Proof of Funds Required in Real Estate?
Even though it would be ideal, most sellers and lenders will not take your word for it when you tell them what you can afford. It’s simple to declare you can buy a home in a given price range. However, if the seller does not trust you enough, they will almost certainly require proof. In today’s increasingly competitive housing market, the POF is one of the best tools for sifting through offers and determining which has the best chance of resulting in a sale.
Some buyers who deal directly with homeowners may not be asked for a POF. But the majority will be required to submit one by the time they make an offer. Many sellers want the POF and the offer to come in together so they can evaluate the offer’s plausibility immediately. The buyer may make an offer without a POF in some situations, but they will usually be required to follow up with one within a day or two.
Realtors may also request a POF from their clients far before the offer stage as a form of pre-screening. Knowing what a client can afford will assist a realtor in picking which homes to show to whom, and will allow them to approach sellers with greater confidence in their clientele.
Types Of Funds in a Real Estate POF
The funds in proof of funds can take several forms, but the most important element is that they must be liquid capital or funds that the buyer can access and utilize at any time. Cash is the most common example because it is easily transferred and does not vary in value.
However, some additional forms may be considered, such as:
- Money market funds
- Line of credit
- Stocks (though some sellers may ask the buyer to sell their stocks before including them in their offer, as the cash value of the stock can fluctuate)
Certain types of assets do not count as proof of funds. This is because they can be difficult to obtain and often carry financial penalties for early withdrawal. Here are several examples:
- Retirement accounts
- Accounts for mutual funds
- Life insurance policies
Proof Of Funds Letter
A proof of funds letter is a document that confirms that a home buyer has enough liquid cash to purchase a home. It’s important paperwork that all house sellers will want to see. And so, home buyers shouldn’t feel obligated to make an offer until they have it.
Read Also: 33+ Best Gifts For Realtors In 2023
What Is the Difference Between a Proof Of Funds Letter and a Preapproval Letter?
A pre-approval letter is not the same as a proof of funds letter. A pre-approval letter states that a lender will grant a loan to a buyer. In contrast, a proof of funds letter states that the buyer has cash available to pay for other fees related to the purchase of the estate
Preapproval Letter
A mortgage preapproval letter informs sellers that you will be able to afford the property. While someone may be preapproved for a loan, this does not guarantee that they will receive one.
The first step in having a mortgage approved is to get prequalified for a loan. This indicates that a lender has estimated how much a buyer would be accepted for depending on their credit score. This figure is a rough approximation.
The customer is then preapproved. They supply additional information, such as a bank statement and pay stubs, and the lender does a hard credit check to analyze the buyer’s debt and credit situation. After you apply, an underwriter will examine your assets and financial data to determine what you can qualify for. When completing your application, employ a mortgage approval checklist to ensure that you include all of the essential information.
Proof Of Funds Letter
When sellers want to see proof that a buyer can fund the closing expenses and down payment, they will request a POF in addition to a preapproval or prequalification. They may also demand a POF even if a bank or lender does not require one to qualify you for a mortgage, so bear in mind that having one is a smart idea anyway.
Who Needs A Proof Of Funds Letter In Real Estate?
Essentially, all buyers must present a proof of funds letter. Even if you secure a mortgage to finance your home purchase, you’ll still need money for a down payment (preferably 20% of the purchase price) and closing expenses (an additional 3% to 4% of the purchase price).
While lenders will look into your finances to verify you have the necessary funds to seal the sale, property sellers will also want to see that you have these funds saved up. That’s why you’ll need to give them a proof of funds letter, as well as a pre-approval letter from your lenders stating that they’re willing to offer you the remaining funds.
Home purchasers who do not require a mortgage since they are paying cash are not exempt either! They will also be required to present proof of money for a cash offer—of course, for a much higher sum.
Types Of Proof Of Funds Letters
These letters are written by someone who is requesting that a bank release his or her proof of finances, usually for the purpose of buying a house with cash. In such instances, a person would need proof that he or she has sufficient funds in his or her account to make a transaction. Typically, these letters are requested by the account owner to be provided to a third party.
You must seek this type of letter from your bank in order to acquire it. Because it serves a different purpose than a bank statement, the format differs. When researching what is a proof of funds letter, you will discover that there are various sorts that are used for different purposes and have somewhat different formats.
Let’s look at the many types of letters that you can find beneficial.
#1. Bank Comfort Letter
Depending on their financial purpose, these letters can be referred to in a variety of ways. An accounting company or a CPA can provide a Comfort Letter, which verifies that an organization has adequate money or funding. This is commonly used when an initial public offering is made.
A Bank Comfort Letter is developed to act as written evidence for a buyer. It is to be supplied to a seller as proof that the buyer is willing and capable of making the payment when it comes to proof of funds letters. This is typically requested when a vendor refuses to provide a financial guarantee against a specific outcome, such as security performance.
#2. Bank Readiness Letter
This kind is frequently used in international trade. When international export or import financing is involved, a buyer or seller will normally require a bank letter of readiness.
This type of letter can be provided from one bank to another. The goal of this letter is to confirm to the other bank that they are fully prepared and ready to proceed with the transaction. This type of letter is critical in ensuring that a transaction is done correctly.
#3. Blocked Funds Letter
This sort of letter is typically used to demonstrate that funds in a specific account have been reserved or “blocked” for a specific transaction. These letters are typically used in bank debenture buy or sell transactions and other high-end financial transactions.
Following the issuance of this letter, a particular quantity of funds in an account must not be utilized or exhausted and must remain in the account until they are required for the agreed-upon transaction. Blocking cash can be accomplished by writing to your bank and requesting that the account be blocked on their system.
#4. Letter of Verification of Deposit
When real estate purchases are involved in transactions of any kind, verification of deposit letter is frequently sent to demonstrate that the bank is capable of funding. Different banks commonly pre-format this type of document so that all of the account holder’s information is already included. The paper may also include the banker’s remarks or directions.
As you can see, there are various forms of proof of funds letters available, depending on the situation. So, if you’re learning how to manufacture them, make sure you know which type you’ll need first. Knowing this will help you make your request to the bank or other financial organization you will be requesting from. Now, let’s look at some of the most common mistakes made with these types of documents.
When And How To Obtain A Proof Of Funds Letter For Real Estate Purchase
Obtaining a proof of funds letter for a real estate purchase is typically a quick and simple process in which you contact your bank and request one. While you may usually get one within a day or two, bear in mind that some banks operate more slowly than others, so allow at least a week for the statement to be issued. In other words, before making an offer on a house, get a proof of funds letter.
What Should a Proof of Funds Letter Contain?
Proof of funds letter consists essentially of the account holder’s name and the current balance of available funds, all on bank letterhead and signed by a bank official. However, in many circumstances, a recent bank statement from a checking or savings account where the money is held can also qualify as proof of funds, so it’s worth checking to see whether that’s enough.
Are you concerned about handing over all of your personal information on your bank statements (many of which include credit card and social security numbers)? You can protect your privacy by blacking out important information on the statement before handing it over to a seller. You’re free to go as long as it’s evident that the account is yours and that the money is there.
Many banks offer their own proof of funds templates. However, if you need your own, a sample letter is provided below:
Whoever it may concern,
We confirm that as of this date, _____[Name of Company/Individual]________ has accessible the sum of . If you require proof of the money listed above, please contact us at your earliest convenience.
Yours sincerely,
[Designated Officer]Date:
Contact Information:
What Other Documents Are Acceptable as POF?
A variety of documents qualify as POF. Proof of Funds can be obtained from your bank or financial institution that holds your money in the form of a bank, security, or custody statement. Bank statements are the most commonly used form of proof of funds and can usually be acquired online or at a bank location.
In Conclusion,
Proof of funds in real estate ensures that buyers not only have the funds available to make a purchase but that they also have legal access to those funds. Obtaining a proof of funds letter for a real estate purchase is not a tedious process, and we have outlined how you can go about it in this guide.
Frequently Asked Questions
How long does it take to get a proof of funds letter?
You can get a proof of funds letter within a day or two, depending on the bank.
Is it normal for a seller to ask for proof of funds?
Every seller asks for proof of funds. It assures them that the buyer has the money to make a purchase.
Can I get a proof of funds letter online?
Yes, you can get a proof of funds letter online.
Can I use cash as a proof of funds?
Yes, you can use cash as a proof of funds.
How do I get proof of funds?
Once you have obtained your funds and they have been in your account for 3–6 months, sometimes 9 months, depending on the requirements of the country to which you are applying, you must now obtain an official letter from any of the banks or financial institutions where the funds are held.
What do proof of funds look like?
Bank statements, verified financial documents, proof of an open line of credit, or a simple note from your bank stating that the buyer has the requisite funds are generally accepted as proof of funds.
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