One major aspect in Real Estate acquisition and leasing is the proof of funds letter; this is a document that proves that a home buyer has enough liquid cash to purchase a home. Due diligence on the part of the home sellers is the desire to see such paperwork, this assures concerned parties that a home buyer is ready to make an offer and committed to such purchase.
What Is Proof of Funds?
Proof of funds can simply be described as a document provided to ascertain that a person has sufficient money on hand to cover specific expenses. Proof of funds can come from several sources, which includes bank statements or a proof of funds letter.
There are a few scenarios where the person may be asked to provide proof of funds, but this is mostly common in real estate transactions. For example, in real estate, a seller may ask the buyer to provide proof of funds to show that they can cover the costs of purchasing a home.
Why is a Proof of Funds Letter required for property acquisition ?
The point of a POF letter is to show that you are making a legitimate offer as a buyer. In an instance where there are multiple persons making offers, having a Proof of Funds letter, may put you at an advantage over others.
Sellers prefer to see POF letters alongside the offers made by prospective buyers, this is to ensure legitimacy and to prevent situations where they miss out on serious/legitimate offers, while waiting on a high-ball offer from someone who can’t actually deliver.
Who needs a proof of funds letter?
Technically all prospective buyers need to provide a proof of funds letter. In an instance where an individual is getting a mortgage to finance their home purchase, they’ll still require enough money for down payment, ideally 30% of the price of the house and closing costs.
Lenders on the other hand would delve deep into your finances to ensure you have the necessary cash on hand to close the deal, in this case, home sellers would also want to see that you have these funds set aside. This is why the provision of a POF letter, as well as pre-approval letter from your lenders confirming that they’re willing to loan you the rest of the money you need for the purchase.
Home buyers who don’t need to take out a mortgage because they’re buying the house in cash aren’t entirely off the hook either. They would also be expected to provide a proof of funds for a cash offer—for a much larger amount.
What counts as proof of funds in real estate?
A proof of funds letter can be obtained from the institution where your money is being held, typically a bank. It can also come from another type of asset, such as an open credit line or money market account where funds can be accessed quickly.
It’s important to highlight that having a lot of money in mutual funds and stocks can not count as proof of funds, since the money can’t easily be withdrawn and such amount varies based on day to day market conditions. Per adventure it’s needed for down payment, it is advisable to schedule a plan to transfer the money sooner rather than later into an account that’ll count as proof of funds.
What a proof of funds letter should include:
Essentially, a proof of funds letter includes the account holder’s name and current balance of available funds—all on bank letterhead and signed by a bank official. However, in many cases, a recent bank statement from a checking or savings account where the money is being held can also serve as proof of funds, so it’s worth checking if that alone will suffice.
To protect your privacy, sensitive information on the statement can be redacted efore providing the statement to a seller. The most important thing is that the account is yours and the money that is contained in it.
