Proof Of Funds Letter: Everything You Need To Know
The path to homeownership requires extensive paperwork. One of the important documents you’ll encounter when buying a house is a proof of funds letter. As the buyer, you may need to provide this letter to the seller.
Let’s explore proof of funds so you know exactly what to expect as a homeowner.
Proof Of Funds (POF): A Definition
A proof of funds letter is a letter that verifies whether an individual or business has enough money to cover purchase costs in a real estate transaction. Sometimes referred to as a POF, this document gives the seller confidence that you are able to complete the transaction.
What Counts As Proof Of Funds For A Cash Offer?
When making a cash offer on a property, the proof of funds documentation is especially important. The means to provide this proof vary based on the transaction.
In some cases, you can provide a certified financial statement or copy of a savings account balance. In other situations, you may need a letter from your bank or financial institution. Further options include security statements or custody statements.
How Does A Proof Of Funds Letter In Real Estate Work?
When a seller receives an offer, it’s important to know that the potential buyer has the funds to back up their offer. Otherwise, the seller could be stuck starting the process with a buyer that won’t be able to complete the transaction due to a lack of funds.
A POF letter lets the seller know that you have the resources to back up your offer. Even if you are using a mortgage loan to spread out the costs, the home purchase process is expensive. At the very least, you’ll need to cover closing costs. Plus, you’ll likely need to make a down payment.
Writing A Proof Of Funds Letter To The Bank
If a seller or lender requires a POF letter, then you’ll usually need an official document from your bank. Here’s a closer look at what this document looks like.
What Should A Proof Of Funds Letter Include?
A proof of funds letter should include some basic information, such as the following:
- Bank’s name and address
- An official bank statement
- Balance of total funds in the bank account as well as their checking or savings account
- Signature of an authorized bank employee or notary
- The date the money was in the account
You’ll also want to include contact information in case the seller has any questions.
How Do You Write A Proof Of Funds Letter?
The bank will need to write your proof of funds letter. But you may need to make this request in writing. When asking for this documentation, request a POF letter for the desired amount. The good news is that your financial institution should be able to whip up this letter within a day.
What Are Some Common Mistakes When Writing A Proof Of Funds Letter?
When writing a proof of funds letter, it’s important to only include funds that are immediately accessible.
In other words, liquid assets like deposit accounts, such as checking and savings accounts, will qualify. But assets that aren’t immediately accessible, like certificates of deposit or mutual funds within retirement accounts won’t count toward your available funds.
If you want to pull funds from your retirement accounts to cover your home purchase costs, make sure to weigh the penalty fees. Although you can pull out up to $10,000 as a first-time home buyer from your IRA without a penalty, withdrawals over that limit are subject to a 10% additional tax.
When Do You Need A Proof Of Funds Letter?
Most money lenders require a proof of funds letter to ensure a potential borrower has the money to finalize the purchase. Additionally, sellers may request a POF letter to confirm that a buyer can cover the closing costs.
Why Do Sellers Require Buyers To Have Proof Of Funds For Real Estate Transactions?
A POF letter encourages a seller from moving forward with an offer from a buyer because they know they have the means to close on the home sale. The documentation creates a level of trust between the buyer and seller as they navigate this major transaction.
In general, sellers and real estate agents will not accept an offer without this critical documentation.
Are A Proof Of Funds Letter And A Preapproval Letter The Same?
A preapproval letter and a POF letter are not the same.
A mortgage preapproval letter gives the seller confidence that a buyer can afford the home purchase with the help of a lender. In contrast, a POF letter indicates that the buyer can afford the upfront costs associated with closing on the home.
How To Get A Proof Of Funds Letter From The Bank
Now that you know what it is, let’s explore how to obtain a proof of funds letter.
Step 1: Open An Account
If you don’t have an account ready to hold the funds earmarked for your home purchase, now is the time to tackle that. But if you don’t want to create a separate account, then your current checking or savings account will suffice.
Step 2: Move Money
In many cases, you’ll have funds spread out in different accounts. It’s a smart move to consolidate your home buying funds into a single bank account. When the funds are in one place, a single financial institution can verify your funds and provide the documentation.
Although this can take a few days, having the funds in one place lowers the possibility of getting denied by the seller.
Step 3: Request A Proof Of Funds Letter From The Bank
With your funds in one account, it’s time to request a POF letter. Simply head down to your local bank branch or call the customer service line to make your request.
Luckily, most financial institutions are able to provide this document within a single day. But if you have funds scattered across banks, then it might take a few days to receive this document.
Step 4: Get Bank Statements
Many sellers will take your most recent bank statement as proof of the necessary funds. But if providing a proof of funds letter, you’ll still need to have copies of your bank statements attached to the letter.
Generally, you can find these documents online or at a nearby bank branch.
Step 5: Make An Offer
After you have the proof of funds letter, you can make an offer on a home. When crafting your offer, provide the seller with a specific time limit to decide. If all goes well, you’ll hear back with an acceptance soon.
Step 6: Provide The Seller With A Proof Of Funds Letter
When a seller accepts your offer, you’ll need to provide the proof of funds letter. Plus, any supporting documents, like your bank statements. Before handing over the information, remove any sensitive details, such as your account number and address.
The Bottom Line: A POF Proves You Can Afford The Home
A proof of funds letter offers a seller evidence that a buyer can purchase a home. As you move through the home buying process, this is a critical step. If you plan to take out a mortgage to complete your home purchase, an approval letter is another necessary document. Take a minute to start the approval process with Rocket Mortgage® today.