What Is a Proof of Funds Letter in Real Estate?CASAPLORERTrusted & Transparent
What You Should Know
- A proof of funds (POF) letter contains information about how much money a person or an entity has available in their bank.
- The funds shown on POF must be liquid because the buyer has to pay for down payment, closing costs and escrow.
- A POF letter is different from pre-approval letter because a POF letter shows how much money a person has in their bank and pre-approval letter ensures that the buyer can get a mortgage for a certain amount.
What Is a Proof of Funds Letter?
Proof of funds (POF) is a document that provides information about how much money a person or an entity has available. This document is usually required by a seller of a property to ensure that a potential buyer has enough liquid funds to cover the costs associated with purchasing a property. These costs usually include closing costs, escrow, and down payment. If a buyer is planning to purchase a property in cash, they may need to show that they have enough funds to complete the transaction.
The funds that are shown on POF must be liquid because the purpose of the document is to show that a buyer can cover the expenses that come with buying a house. Because of that, not all funds may qualify to be on the proof of funds statement. Some funds such as bonds, life insurance and mutual funds may not be eligible to be included in the POF. In many transactions, a printed bank account statement may be sufficient for POF. Additionally, a financial statement of money market accounts may be used for POF. In some cases where POF should be more formal, a buyer might need to obtain a bank letter that states the exact amount of liquid assets available on their account.
|What Funds Are Eligible for Proof of Funds?|
|Money Market Securities||Bonds|
|Line of Credit||Mutual Funds|
|Cash in Accounts of Other People||Life Insurance|
Why a Proof of Funds Letter is Needed
In some rare cases where a property is sold by an owner without a real estate agent, a proof of funds letter may not be required. If a real estate agent is selling a property, then they will likely require the letter to ensure that a buyer can cover the costs associated with purchasing a property. Without a POF letter, the deal for buying a house may fall through.
A proof of funds letter may also increase the chances of buying a property if there are multiple bidders on the property. In this case, the letter shows the buyer’s interest in purchasing a property. If the seller of a property is looking to close the deal fast, for example during a short sale, then they may favor a person with all the paperwork ready compared to people who still need to collect documents before closing the deal.
Pre-Approval Letter vs Proof of Funds Letter
A pre-approval letter and a POF letter are not the same and are used in different situations. Generally, a buyer may need to provide both letters when purchasing a house because they contain different information.
A pre-approval letter is issued by a buyer’s lending institution that pre-approved them for a mortgage. This letter indicates that a buyer has the approval for a mortgage loan, which means that they can afford a house and will be able to close the deal on the house that is being bought using a mortgage. If a buyer does not require a mortgage and can pay for a property in cash, then they do not need a pre-approval letter at all. On the other hand, a pre-approval letter is a requirement for buyers who would like to finance a property. If a buyer cannot obtain a mortgage pre-approval due to bad credit history, they should learn how to buy a house with bad credit.
A POF letter is issued by a buyer’s bank to indicate how many liquid assets the buyer has. There are multiple costs associated with purchasing a house, and some of the costs must be paid by the buyer on top of the selling price of a property. A POF letter assures that a buyer has enough money to cover the costs of buying a property. In case when a buyer purchases a property with cash, the buyer should provide a POF letter that shows sufficient balance to purchase the property.
What to Include in a POF Letter
Proof of funds letter is an official document that is issued by a buyer’s bank. In some cases, a printed copy of a bank statement is sufficient for POF. On the other hand, in cases where a POF letter should be formal, a signed letter on bank letterhead that can be requested from the bank should be ideal. If the letter comes with certain private information that a buyer would like to keep secret, the buyer can black out sensitive information that is not integral to the analysis of the statement.
Other details must be included in a POF letter regardless of the intended use:
- The Name and Address of a Bank
- Account Statements
- Balance of Each Account
- Date When the Statement Has Been Prepared
An Example of a POF Letter
Most of the time, a bank will provide a proof of funds letter fully prepared without additional cost. It is an uncommon practice for an individual to compile a POF letter on their own. The following template provides an example of a POF letter to understand what is included in the letter. This POF letter should not be used as a template. Instead of using a template, a buyer should contact their bank to receive the letter.
[Bank Phone Number and/or Email]
Dear [Seller’s Name],
This letter and enclosed financial statements are to certify that [Buyer’s Name/ Entity’s Name] has an account in our bank since [Year] and is in good standing.
As of [Date], [Buyer’s Name/ Entity’s Name] has a total combined balance of cash deposits, money market instruments, and lines of credit with our bank of $[Bank Account Balance]. We have attached a financial statement for each account that belongs to [Buyer’s Name/ Entity’s Name] in our bank.
If you have any questions regarding the information provided in this letter, please contact us at [Bank Phone Number and/or Email].Sincerely,
[Name of Bank’s Agent].