There are a few lesser-known aspects of the home buying process that can be surprising to discover as a first-time buyer. One such component is a proof of funds letter, which the seller typically requests before an offer is accepted. This step is more of a formality and should be relatively easy for homebuyers to complete — if they have the necessary funds. Keep reading to learn exactly what a proof of funds letter is and why it is needed.
What Is A Proof Of Funds Letter?
A proof of funds (POF) letter is an official statement showing that a homebuyer has enough liquid capital to cover the costs of buying a home. The proof of funds letter must demonstrate that the homebuyer can afford the down payment, escrow, and closing costs. It is typically required by sellers in addition to a pre-approval letter. You can obtain a proof of funds letter from your bank or financial institution.
What Funds Qualify As POF?
The funds that qualify as POF include any capital that you can access on the spot or assets that can be easily liquidated. These funds could be in a bank account or money market account, for example. If you have funds across multiple accounts, you can provide multiple statements as your proof of funds. In some cases, a credit line may also be acceptable as proof of funds.
Unfortunately, there are a few common asset types that do not qualify as proof of funds. These include mutual funds, shares or bonds, life insurance, and valuable possessions. The reason is that these funds are not readily available in the same way that a bank account or money market account is. If you plan on using investments to cover your down payment, you will need to liquidate the asset before requesting an official proof of funds.
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Proof Of Funds Vs. Pre-approval
A proof of funds and a pre-approval letter are often both required when an offer is submitted on a house. Both of these documents demonstrate that you have enough funding to move forward with the transaction, but they each do so in different ways. A proof of funds letter will only show that you have enough capital to cover the down payment and closing costs. A pre-approval letter will also be needed to show that you are approved by a lender for a home loan to finance the rest of the purchase.
The process of obtaining each document is different as well. A certified bank statement may be enough to qualify as your proof of funds; however, obtaining a pre-approval letter will require a much more thorough application. To get pre-approved, you will need to submit extensive financial information about your income, assets, debts, and employment history.
Why Do You Need A Proof Of Funds Letter?
There are a few situations where a proof of funds letter is explicitly needed to proceed with the home buying process:
Cash Down Payment: Sellers may want to see if you have enough cash to cover the down payment instead of relying on credit or loans. As this can make the offer more concrete.
Lender Requirements: When you complete the pre-approval process, your lender may request a proof of funds letter to show that you have enough cash to cover the rest of the purchase.
Cash Offer: If you plan on buying a home with cash, you will need to prove that you can do so. You wouldn’t need a pre-approval letter to submit an offer in these cases, only the proof of funds.
What Should A Proof Of Funds Letter Include?
A proof of funds letter should be issued by a financial institution and should include certain identifying information. Here are a few items a proof of funds letter should include:
The financial institution’s name and branch address
The date the statement is made
An official bank statement about the account holder
Account descriptions (savings and/or checking) and balances
Signature of an authorized employee at the bank, or a notary
Copy of an online bank statement
How To Get A Proof Of Funds Letter
The process of getting a proof of funds letter is relatively straightforward — you simply need to prepare your accounts and request the proper document. Here is an exact step by step to walk you through the process:
Transfer Funds To One Location
Request The Letter From Your Bank
Secure Your Information
1. Transfer Funds To One Location
The first step is to get all of your money into one account. While this is not technically required, it can help boost your credibility in the eyes of the seller. This is because, with multiple proof of funds letters, the verification process can take longer. It is typically recommended to make the necessary deposits and transfers to get your funds in one location and use that account for the proof of funds letter.
2. Request The Letter From Your Bank
Once your account is set up with the necessary money, request a proof of funds letter by calling your bank. In most cases, it takes only a day or two to process and provide you with the letter. However, if you are waiting for transfers or deposits to process, you will need to wait until these are complete. Review the letter to ensure all of the information is accurate before submitting it alongside your offer.
3. Secure Your Information
As you can guess, a proof of funds letter contains sensitive financial information. This includes your account numbers, address, and more. Be careful when handling this document and take steps to make sure it ends up in the right hands. This means working with your real estate agent or lawyer to make sure the seller is credible as well. Never submit a proof of funds letter if it is not required.
The various steps in the homebuying process can be intimidating to navigate, especially as you discover more and more requirements. While a proof of funds letter may seem like one more addition to this process, they are relatively easy to obtain. These letters are necessary to demonstrate that you have enough capital to purchase the property. While it can take a few days to get all of your money in one place, once you do, a proof of funds letter should be available the very next day.
Did this help you understand how to get a proof of funds letter? Share any questions you have in the comments below.
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