What Is a Proof of Funds Letter, and When Do You Need One?

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There’s a lot that goes into buying a home, from finding a real estate agent to researching neighborhoods to visiting open houses — and then there’s the financial side of things. You’ll be working closer with a bank than you probably ever have before,  and, as a potential buyer, you’ll start submitting mountains of paperwork to your lender and real estate agent. Fortunately, you can keep yourself from getting lost in the flurry of purchase contracts and signatures by boosting your understanding of some of the documents that are essential to — and just plain helpful for — the home-buying process. One of these beneficial pieces of paper is a proof of funds letter, or POF.

Understanding what a POF letter is, why you need one and how it differs from a pre-qualification can make your home-buying adventure a smoother one and take some of the uncertainty out of the financial aspect of this life-changing process. Take a look at all the need-to-know basics about POF letters as you start searching for your dream home.

What Is a Proof of Funds Letter?

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First things first. A POF letter is almost exactly what it sounds like: It’s a document that shows the amount of funds you have available, and it tells the seller of a home that you have the money to buy that home. This typically includes the fees, escrow funds, closing costs and the down payment you’re making.

A POF letter isn’t required in the sense that it’s mandated by law — it’s not. But some sellers may decide that they personally want to require potential buyers to provide a POF letter. This document shows a home seller that you’re a serious buyer and removes some uncertainty they may have about opting to sell to you. If you don’t have one when you make an offer, the seller is taking a risk accepting you over another buyer who does.  

Here’s one reason why POF letters are important: A potential buyer may come around who makes an offer but hasn’t spoken to a mortgage broker yet. Say they don’t have a POF letter, but the seller decides to accept the offer anyway. In this situation, a lot can fall through before the closing date. The buyer might find out that they’re unable to obtain funding after they’ve made the offer. Meanwhile, the house has sat for a month without getting any offers because it was assumed to be under contract. If the deal falls through, the seller spent valuable time waiting for the funding only to find that the house would become an active listing. To avoid this type of situation, a seller may be more likely to choose a prospective buyer with a POF letter over one without.

A POF letter provides verification, or proof, that you have the money to afford to buy a home. Drafting this document often involves showing your bank statements or other liquid asset statements to prove you have what you need to fully fund the parts of the sale you’ll pay for up front, such as your down payment. This proof ultimately gives everyone more confidence in your financial ability to uphold your end of the deal. And, it can set you apart from other buyers who don’t provide POF letters with their offers.

A POF letter can also be an important part of qualifying for a mortgage. It shows the lender you have the funds needed in order to get your clear to close letter, which in turn can demonstrate that you’ll have your finances in order for closing day.

What Funds Qualify as Proof?

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Proofs of funds come in a variety of forms. Having a bank statement in some cases may be all you need — it will be if that’s where you’re keeping all the money you plan to put toward your initial home costs. However, you might plan to combine multiple sources to cover your total costs. Other examples of funding sources, in addition to money in your bank account, include certified statements from your money market account. The key is that you need to show liquid assets.

A liquid asset is one that you can withdraw for cash almost immediately. Life insurance policies, mutual funds and a statement from someone else’s bank account don’t count as a liquid asset. This means you can’t use them as proof of funds. Additionally, stocks can’t function as liquid assets because their values can fluctuate frequently, and you may not be able to liquidate them quickly.

Possessions also don’t count as proof of funds. If you have a car that’s worth $30,000, for example, you can’t show a statement with its value as your proof of funds. Possessions and materials don’t count as proof because you’d need to go through the process of selling them to actually get the funds in hand.

How Do Proof of Funds Letters Differ From Pre-Approvals?

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POF letters differ from mortgage pre-approvals (and pre-qualifications) in a few different ways. To start, a pre-qualification is a document that gives you a general estimate of how much you can expect the bank to lend you for your mortgage. It’s not as in-depth as a pre-approval, which is a document you’re given only after you’ve actually applied for a mortgage. A pre-approval is a conditional commitment from the bank to lend you a certain amount of money.

You can submit a pre-approval letter with an offer to show a seller that you’re a serious buyer. This type of document demonstrates that you’ve been vetted and verified by the bank to qualify for a specific mortgage amount. This also gives you an idea of your payments, interest rate and terms.

A pre-approval letter needs to come from your mortgage company, and the process is much more extensive than pre-qualifying is. For pre-approval, your lender will call your employer and verify your income. It’ll also verify your assets and obtain copies of your credit report. Your credit will play a role in what interest rate you have. A mortgage pre-approval also factors in your debt-to-income ratio. This is how much debt you have compared to the income you’re bringing in. Student loans, auto loans and credit card balances count as debt. The lower your debt to income ratio is, the better loan terms you’ll have. From here, it’ll determine how much of a mortgage you qualify for. Your down payment will also come in as a factor.

A POF letter doesn’t include details about whether a bank is willing to extend you a loan. Instead, it looks at the assets you already have and explains them to a seller. If you’re buying a home with cash, for example, you don’t need a pre-qualification letter, but you’ll need to show proof of funds. A seller will always be cautious about sales not going through. Including a POF letter with your offer can give them more confidence that you’re a financially sound buyer and the transaction will proceed smoothly.

How to Get a Proof of Funds Letter

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A POF letter can come from several sources. The simplest way to get a letter is to print out or download a bank statement with your balance. You can do this yourself online or at your local bank branch. If your assets are spread out across multiple accounts, it can be helpful to consolidate them into one account (or fewer accounts) so it’s easier for the seller to understand the information you’re providing. This means transferring money ahead of making an offer on a home so your funds are lined up in one place.

In some cases, you may want to sell assets and liquidate other funds or accounts to ensure you have the amount you need to cover your down payment and other fees. Once you’ve completed these steps — ideally before you’re ready to make an offer on a house so everything has time to process — you can get a statement showing the funds are available in your account. To help the home-buying process run smoothly, you can also ask your bank to print this letter for you. The POF letter will have the name and address of your bank, your account number, the names on your account and the balance. Although you can print a statement to show this information, your bank or lender can also provide this information in a more formal document that can demonstrate more credibility to home sellers.

In today’s competitive real estate market, the more documentation you can provide, the better your chances are of purchasing your ideal home. Providing a POF letter to a seller is a relatively simple yet effective tool for helping your offer stand out above the rest.

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