For most of us, buying a house is the largest purchase we'll ever make. With that in mind, it's no surprise that the process requires quite a bit of paperwork, including the verification of your finances. A proof of funds letter (POF letter) is a letter from the bank that shows that you have enough money to cover the down payment and closing costs, giving the seller certainty that you can complete the sale. It’s different than preapproval, which shows proof of your financing.
In real estate, a proof of funds document signals that you have serious interest in buying the property, and you'll typically need to get one as you start house hunting. The seller’s agent may be required to present it when you put in an offer on a home, making it easier for them to determine if you are a serious buyer or not. The agent who's helping you find a house may also ask to see a proof of funds letter before they agree to submit offers on your behalf.
In some cases, you'll be asked to provide a recent bank statement in place of or in addition to your proof of funds letter. Before you give any financial statements to a third party, make sure you black out any sensitive information like your account number.
Any money you have stashed away for your home purchase in a checking or savings account can be used for your proof of funds letter. You can also use other assets as proof of funds so long as they are liquid assets that can be easily withdrawn. That means an open line of credit or money market account will count, while mutual funds, stocks, and bonds won't since they aren't liquid and there's a process involved in cashing them out.
POF letters are often required regardless of how you're financing your home purchase. That means you need one whether you're a first-time home buyer getting a mortgage loan for your starter home, a seasoned real estate investor buying their umpteenth investment property, or even a cash buyer. The proof of funds shows that you can cover the down payment and close on the deal.
To prove that you have enough financial coverage for the total purchase price of the home, you'll need to show a pre-approval letter. Sometimes called a pre-qualification, this will show how much money a mortgage lender is willing to give you for your home purchase. Getting a mortgage pre-approval letter is slightly more involved since you'll need to find a lender and provide some information about your finances, like your debt and credit score.
You'll usually get a proof of funds letter from the institution where your money is being held — most often that's a bank. As we mentioned earlier, it's best to start the process of getting your letter before you start house hunting. That way, you'll be ready to make an offer as soon as you find your dream home.
Consider combining your funds into one account if your money is spread out across multiple ones. This step can help simplify your proof of funds process, and potentially your mortgage application later on.
Once you've consolidated your funds, contact the bank or financial institution that holds your money to issue a proof of funds letter that you can use when making offers. Most places, even online banks, have their own template or form for this because funds documents are commonly requested. If they don't, then you can find a sample letter online for them to copy.
Just make sure that the funds document is written on bank letterhead, signed by a bank official, and states how much money you have available in your accounts. If possible, ask the bank to list the exact amount you'll need at closing, this way the seller won't know you can afford more than what you're offering them. If you have more questions about what's acceptable as proof of funds, you can always reach out to your real estate agent.
You may find websites that offer instant proof of funds letters; these are actually what’s known as hardmoney lenders, which issue a loan for potential homebuyers who don’t have the funds along with the letter to show proof.
If you're already a homeowner, your future house hunting budget may be locked away in your current home equity. Because these funds are difficult to access, they may not count as proof of funds. If you're worried about selling your home so you can access these funds, consider working with Orchard.
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