Buying a home is an exciting prospect. It can represent a big step in your finances and a new chapter in your life. Although the home buying process is worth the effort, you’ll need to be prepared to provide proof of funds along with several other documents.
But what is proof of funds? Today we will take a closer look at the process of providing proof of funds and what it is.
What is proof of funds?
You may have heard the term "proof of funds for mortgage" and wondered what it is.
You might know that you have the funds on hand, but a seller cannot simply trust your word. Unfortunately, a seller needs to verify that you have the funds available.
Although a mortgage preapproval letter can be helpful, sellers will usually also ask for proof of funds. The goal is to ensure that the buyer has the means to cover the down payment and any closing costs associated with the loan.
If you have enough money, then providing proof of funds is not a significant inconvenience. You’ll simply need to show that you have the funds ready to spend on the upfront costs of your home purchase.
If the funds are coming in the form of financial assistance from family members or close friends, you'll also need to provide a gift letter.
Documentation of your funds needs to be provided upfront in order to move forward with most home purchases.
Why do sellers ask for proof of funds?
The homebuying process is time-consuming and full of paperwork. When a seller chooses to accept a buyer’s offer and put the home under contract, it is just the beginning. After that, it can take several weeks of paperwork before the sale is finalized.
The lengthy paperwork process required means that the seller will invest a lot of time and energy after accepting your offer for homeownership. That’s why they want to make sure that you have the funds available before you start the procedure.
Otherwise, they could pass up another offer with a buyer who has the funds ready to go. That would likely delay the sale of the home and add to headaches for the seller.
Luckily, it is not a major inconvenience to obtain your proof of funds.
What type of funds are acceptable?
When you are buying a home, there are two main options for financing. You could either buy the house in cash outright or make a down payment to secure a mortgage from a lender.
The funds that are acceptable for each type of purchase vary. Let’s take a closer look below.
Cash buyer
A cash buyer is a person or business that is ready to close with cash they have on hand. The buyer is not looking to take out a mortgage to obtain the property. Instead, they plan to make the entire purchase with the funds they have available.
In order to be a cash buyer, you’ll need to have the money readily available in a liquid way. That means that the funds should be available in an easily accessible account, such as your checking or savings account.
If the funds are not readily available (not liquid assets), then you aren’t truly a cash buyer.
A few examples of buyers who are not technically cash buyers include those in the process of selling off mutual funds, borrowing money from a family member, liquidating funds in an investment account, or waiting for a probate court to distribute them.
Although these examples show that the funds are en route to the buyer, the funds are not readily available at the time of the offer. With that, it is important to disclose your funding source to the seller in the form of a proof of funds letter.
Down payment with financing buyer
If you aren’t a cash buyer, that doesn’t mean you don’t have to provide proof of funds. In fact, you’ll still be responsible for a down payment and other closing costs that could easily add up to thousands of dollars.
And it is still essential to the seller that you can provide proof of funds.
The funds you plan to use for the down payment, and closing costs should be easily accessible. Bank accounts with sufficient cash are what the seller is looking for.
Although you might have physical cash readily available, it can be difficult to prove how much money you have stashed in a coffee can. Sellers are looking for funding documentation from a checking or savings account.
How you should obtain a proof of funds letter
To get a proof of funds letter, contact a bank representative to help you. They are comfortable with drafting these letters, so you can simply request their help.
Example of proof of funds letter
A proof of funds letter (POF letter) will include some sensitive information, such as a recent bank statement with all your transactions, deposits, etc.
The seller needs real proof and details, so having a "proof of funds for mortgage" letter makes things flow more smoothly for everyone.
When you are drafting a proof of funds letter, it must include the following:
- The financial institution's name (your bank's name) and address
- An official bank statement
- A copy of the account and the current balance
- Account balances of all the different accounts held with that banking institution
- A bank-certified financial statement
- A copy of your online banking statement
- The signature of an authorized bank employee
- Specify the date that the money was in the account you're going to use
If you are also working to obtain a mortgage, then you’ll find that the financial fact-checking process is very similar. In some cases, the loan officer for your mortgage will be able to vouch for your financial situation to the seller and the seller’s real estate agent.
However, it is not unlikely that the seller will request their own copy of a proof of funds letter. You shouldn’t have any trouble verifying your funds a second time for the seller if you’ve already talked to a loan officer.
Proof of funds letter template
Here’s a closer look at an example proof of funds letter.
[Bank name and address]
To the seller and seller’s agent:
We can confirm that [your name here] has [x amount] of funds available as of [date]. We also confirm that these funds are free and clear of any debts or liens. Additionally, we can confirm that these funds are from a non-criminal origin. If you require further verification of the funds listed above, then please contact us.
Best, [Your signature]
[Bank representative signature]
Contact information: [phone number and email]
As you can see, these letters are straight to the point. Depending on the number of accounts you have held at the particular bank, you might need to expand slightly to provide all of the details required about the funds.
You won’t find any wasted words in these very black and white letters. The point is to state whether or not you have the funds.
Use these tips to get a proof of funds letter!
Overall, the home buying process can be a happy time. But you should be prepared for an extensive amount of paperwork. And now you know the answer to the question, "what is proof of funds?"
Although you might be able to skirt the vast majority of paperwork by choosing to be an all-cash buyer with the total funds for the home, you’ll still need to provide proof of funds.
As you navigate the home buying process, please take advantage of our resources. We can help you walk through the ups and downs. And since you're reading, see our additional articles about building a house and alternative ideas to using retirement accounts to buy a home!