There’s a lengthy list of papers that real estate investors must compile before closing a deal. Some of them will be necessary in the closing phase, while some may be needed so you can negotiate terms with the seller.
A proof of funds (POF) letter, for example, is often required by the seller before negotiating the terms when purchasing a real estate property. POF proves to the seller that you are a credible buyer who is able to acquire the property. This is especially the case if you’re buying with cash and don’t intend to take out a loan to finance the purchase.
Here are some important things to know about proof of funds letters so you can purchase that dream property or become a real estate investor.
What Is A POF Letter
Proof of funds (POF) is a document or set of papers that confirm a person or business has the capability and finances necessary to complete a particular transaction. Moreover, the POF letter serves as a guarantee that the money required to complete the transaction is readily available and legitimate.
This assures the purchaser has access to the money since the POF is provided by a reputable financial institution like a bank. When purchasing a property, the seller or mortgage lender will want to verify if you have sufficient funds to cover the security deposit and closing costs.
Which Assets Qualify As POF
POF funds are defined as any assets that can be accessed immediately or readily liquidated. If you have enough money in different bank accounts, you may prove that you have the funding by submitting multiple bank statements. In certain circumstances, a credit line may serve as evidence of finances.
However, a few conventional asset classes don’t qualify as POF. This category includes mutual funds, stocks or securities, insurance, and valuable personal property. These assets, unlike those in a financial institution, are not easily accessible. If you want to use these investments to make the security deposit, you must liquidate the asset to request a POF.
POF Letter Requirements
Proof of funds letters must have specific information. In most cases, a POF letter will have to include the following information, ideally on the bank’s official letterhead:
- Name of the account holder
- Name and location of the bank
- Official statement from a bank
- Amount of money in a checking or savings account
- Total funds available
- Signature of authorized bank employee
Whether verifying finances to make a down payment or to show that the buyer has the funds required to avoid securing a mortgage, the procedure is essentially the same. The purchaser will be required to present documentation. A loan officer may sometimes verify the paperwork. Typically, the real estate seller will want to examine the original document.
The following are a few examples of different types of supporting documents:
- An authenticated, recent bank statement
- A statement of internet banking transactions
- A line of credit with an open equity position
- A duplicate of a money market account balance
- A financial statement that has been certified
It may not be easy to provide a POF letter if the purchaser doesn’t save their money on any financial institutions. Also, depositing a large sum of cash might be an issue. Since cash deposits of more than $10,000 must be reported under federal law.
There are a few instances in which a POF letter is required specifically to continue with the house purchase process.
Cash Down Payment
Real estate sellers may want to determine if you have sufficient cash on hand to meet the security deposit rather than relying on credit or a mortgage. A proof of funds letter may help make the offer more realistic.
If you’re taking out a loan, your mortgage lender may require a POF letter to prove that you possess the means to fulfill the real estate transaction.
If you want to purchase a property with cash, you must establish your purchasing ability. Hence, a proof of funds letter is required in these situations, not a pre-approval letter.
What Is The Difference Between A POF Letter And A Preapproval Letter
Proof of Funds letters and pre-approval letters are not identical. While a proof of funds letter confirms that the purchaser has the cash on hand to cover closing fees and other expenses, a pre-approval letter confirms that a creditor is willing to lend to a prospective homebuyer.
Pre Approval Letter
A loan pre-approval letter is intended to confirm that you can afford to buy a house. While you may be pre-approved for a mortgage, this doesn’t guarantee you will get one immediately.
Prequalifying for a loan is the initial step toward mortgage approval. This indicates that a mortgage lender has provided a range of possible loan amounts depending on the purchaser’s credit rating.
Then, the purchaser is pre-approved for financing. They provide further documentation, including official bank statements and payslips, and the creditor conducts a rigorous credit assessment to ascertain the purchaser’s debt and credit situation.
Real estate sellers may request a POF in conjunction with a pre-approval letter if they have to verify that a purchaser can afford the closing fees and deposit. Even if you’re acquiring a loan to finance the acquisition, a seller may demand a POF letter to guarantee that you’ll be able to close on the purchase. Hence, having a POF is always a smart idea, regardless of the situation.
How To Get Your Proof Of Funds Letter
Obtaining a proof of funds letter is a reasonably simple procedure. You only need to produce your financial statements and collect the necessary documentation. Here’s a quick guide to help you along:
1. Transfer Funds To One Account
If you intend to use money from numerous accounts to make the transaction, you will need the details for each account. It could be more convenient to consolidate all of your money into a single account, so you only have to submit the details once.
To start, transfer all of your funds to a single account. Even while it isn’t strictly necessary, it may allow you to gain the seller’s trust. If you have multiple accounts, the verification procedure might take longer. This can also help you keep track of the total assets you have accessible.
Making the required deposits and transactions is suggested to consolidate your cash and leverage that account to produce the POF letter. Transfers are often possible online, but you may need to visit multiple banks to acquire checks to complete the transaction.
2. Request The Letter From Your Bank
Once your account has been funded with the requisite cash or consolidated your funds in one account, contact your bank to get a proof of funds letter. In most circumstances, processing and issuing the letter takes just one to two days. But, if you are awaiting the completion of transfers or deposits, you must wait until they are done.
Moreover, you’ll need to confirm that your current contact details are in the POF letter. Next, before sending the letter with your offer, check it to confirm that all of the data is true and updated.
3. Safeguard Your Information
Like any other financial data, you’ll want to safeguard your proof of funds letter after getting it. As you are probably aware, a POF letter carries very confidential financial information. This contains your bank details, address, and other personal information.
Exercise caution while handling this letter and ensure it reaches its intended recipient. Moreover, it’s important to check the seller’s credibility with your attorney. Many scammers may require this document to know if they’re transacting with a person with considerable financial value.
Thus, it’s imperative that you only hand over a POF letter to people that you have properly investigated or someone you trust. Never provide a POF letter unless it is necessary. Never share your POF with anybody who doesn’t have a role in completing the transaction. Finally, be on the lookout for bogus sellers.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.