If you want to buy a home or investment property, you will need to provide proof of funds to move forward. There is no way around it.
Keep reading to learn everything you need to know about the proof of funds process.
First up: What is a proof of funds letter in real estate?
A proof of funds (POF) letter is a document from a financial institution that demonstrates you have sufficient funds to pay for a transaction. POF letters are typically issued by your bank, credit union, money market account, or other institution where you keep your money.
A POF letter is not as simple as taking a snapshot of your current bank statement. In other words, you can’t simply log into your online account and present a quick overview indicating you have money. This is something that requires submitting a formal request to receive with your financial provider.
Some new homebuyers tend to feel uneasy about this process, which is completely normal. After all, it’s not every day that you let strangers peer into your bank accounts.
Rest assured this process is nothing to stress over, assuming you have funds in your account and nothing to hide. This is a standard procedure and is very common when buying a piece of real estate.
How to handle a proof of funds request
1. Find a property you want to buy
The first step is to hire a real estate agent and shop around for a property.
Make sure you’re in a position to buy and that the property is a worthy investment. You should be entirely confident that you want the house so that you don’t waste time.
2. Analyze your liquid assets
Next, take a look at your bank accounts. Figure out where the bulk of your liquid cash is and how you’re going to finance your transaction. This may include high yield savings accounts (HYSAs), money market accounts, or even brokerage accounts.
Suppose you plan to pull money from your retirement account, which is generally not recommended. You should contact your financial institution to learn how much you can withdraw, how long it might take for the funds to transfer, and if there are any penalties.
3. Obtain proof of funds
When your self-audit is complete, approach your bank or lender and ask for a proof of funds letter.
Unfortunately, the bank can’t simply print out a statement and send you on your way. By issuing a proof of funds letter, a financial provider essentially takes responsibility for claiming that you have reserves in place to fund a real estate transaction.
As such, the bank will typically analyze what’s in your accounts, as well as your employment history to verify how the money got into your account. The bank is going to want to see that your money did not come from illegal means. Most of the time, the bank also runs a credit check.
4. Analyze the results
Wait 24 to 48 hours for the proof of funds request to clear. When it comes back, read the letter and analyze the results.
In some rare cases, a bank may deny a proof of funds request. For example, you may not be in good standing with the bank, causing them to refuse your request until you meet certain conditions. If the results do not come back in your favor, contact the bank and ask for an explanation.
5. Put an offer on the property
Next, transfer the proof of funds letter to the seller. By sending the letter to the seller, you’ll indicate that you have the necessary funding for the property.
Keep in mind that this is not a mortgage pre-approval from a moneylender—it’s just a financial statement saying you have enough money to fund the home purchase. You’ll still have some hurdles to clear with the homeowner before you buy the property, but you’ll be on your way towards closing a deal.
Why a seller may request proof of funds
There are a few reasons why a seller or their realtor may request proof of funds from a buyer.
1. Vet offers
Savvy real estate agents may request proof of funds when they have multiple offers. Off the bat, they might be able to refine which offers are worthwhile, depending on who already has a POF statement and who doesn’t.
A proof of funds letter also helps the agent reduce the number of offers and get a better sense of the true interest in a property. This is common practice when selling expensive properties because fewer buyers are likely to have enough cash to follow through on the transaction.
Suppose an interested buyer has a down payment saved but not enough money to cover closing costs (which can be substantial). In this case, the offer is likely to fall through, wasting the time and money of all parties involved. A POF statement can prevent that outcome.
2. Persuade the buyer
A seller may request proof of funds to give the impression there is heavy interest in a property. Agents sometimes do this to make it appear there is more interest than there actually is, with the goal of encouraging an interested buyer to up their offer or expedite the process.
This is a reminder that you have to be on top of your game when buying real estate. A good real estate agent (for the seller) often uses little tricks like this to move a property. This is why as a buyer, it pays to have a stellar agent on your side who has your best interests in mind.
3. Gain visibility into funding
A seller may also want to make sure that your funds are legitimate, meaning they’re not coming from non-traditional assets like Bitcoin that first need to be liquidated or transferred.
Tips for completing the proof of funds process
Do not attempt to stretch the truth about liquid assets because this could be grounds for legal action.
If you have a valid reason for being unable to produce a proof of funds letter, try contacting the agent and explaining your situation. The worst that can happen is you will get rejected, and the seller will move forward with another buyer.
Don’t wait until you want to make an offer to request a proof of funds letter. The request could take a few days. If the property you want is in high demand, it will probably sell on the first day of showings, meaning you could be out of luck.
Also, some agents have a short window of time for accepting a proof of funds letter. It’s much easier to go into the buying process with a proof of funds letter at-the-ready, so you can easily produce it when a seller asks for one.
Frequently Asked Questions
What is a down payment?
A down payment is a large payment you’re expected to make when closing a property with a mortgage loan. A down payment is typically 6% of the purchase price. However, the more money you put down, the lower your monthly mortgage payments will be. Generally speaking, if you put 20% down, you can avoid paying private mortgage insurance (PMI). You are also likely to get a better interest rate at 20% down versus 5% down.
What is a pre-approval letter?
A pre-approval letter is a document that indicates a lender is willing to provide a mortgage loan to a buyer for a certain amount. Pre-approval letters are generally the first step you take when you want to get a mortgage loan from a lender. In many cases, real estate agents require pre-approval letters to show properties.
Do you need a proof of funds letter for a cash offer?
Yes, most likely. The buyer doesn’t have to comply with the POF request, but it could cause the seller to reject an offer and move on with another candidate.
How much cash do real estate investors need?
It largely depends on the type of real estate transaction.
If you are applying for a mortgage, you’ll need to come up with enough for a down payment, closing costs, and other fees. For a typical home purchase, I would say you should have from 10% to 30% of the purchase price saved in cash. You will also need to have enough money to cover repairs and unforeseen circumstances (e.g., if you lose your job, you will still owe mortgage payments).
Is home buying worth it?
For most people, yes. Home buying is one of the best investments you can make, so long as you are on stable financial ground and the property is a solid investment.
Before you buy real estate, make sure you have a solid understanding of why you want to buy a home. This is a massive financial investment that requires careful consideration and planning.
Do you have to provide your phone number for a proof of funds letter?
Your financial institution should already have your personal information, so it should just be a matter of confirming your contact information with your bank. The bank is also most likely going to ask for proof of identification, including your license or identification card and Social Security number.
Are closing costs expensive?
Closing costs can be very expensive and can run as high as 2% to 5% of the total loan amount. Closing costs cover a variety of expenses ranging from agent fees to appraisals, inspections, taxes, and insurance.
The buyer typically has the option to pay closing costs upfront or roll them into the total cost of a loan, the latter of which costs a lot more due to time and interest. If possible, pay for your closing costs upfront and you’ll save thousands of dollars over the course of a loan.
The Bottom Line
Don’t panic when a seller requests proof of funds. This is par for the course with all real estate transactions.
Your best bet is to have your POF letter ready to go ahead of time so you can easily provide it to the agent and move forward with the purchasing process. You will also need to have enough money to be in the best position to buy.
The more money you save up each month, the better your chances are of finding the home of your dreams. Good luck!
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