Are you planning on buying a home and paying cash? If so, you're likely going to need to be able to prove to the seller and their real estate agent that you have the money. This will be done by providing a proof of funds letter.
Proof of funds is a document that shows you have the money to invest. It is usually a paper trail that goes back to your bank or other investment accounts.
Let's look at everything you need to know about POFs so you can ensure you'll land the home of your choice.
What Does Proof of Funds Mean When Buying a House?
When purchasing a home, you may need a Proof of Funds document to show the seller that you can cover the agreed-upon sale price. The document may include the down payment, escrow, and closing costs.
When there is a cash offer on a house, the seller and their real estate agent will want to know if the buyer is good for the funds. Without proof, the sale could fall through.
The seller could keep the earnest money, but that would be a small consolation for having the home off the market.
What POF Funds Will Qualify?
Several types of funds can be used to qualify as POFs. Sometimes, simply having a bank statement from your bank or printed online will qualify.
Additionally, a certified financial statement or copy of your money market account balance will usually suffice. For example, if you have your funds in an investment account such as Fidelity, Charles Schwab, or another company like them.
Sometimes, you will need a letter from your bank or financial institution stating the amount of accessible or liquid funds you have available.
To qualify for a personal property exemption, your assets must be able to be quickly and easily moved into cash. This means that mutual funds, life insurance, another person’s bank account, shares, and bonds, or proof of other possessions do not qualify as POFs.
Most real estate agents will be astute enough to know the difference between liquid and non-liquid funds.
A Preapproval Letter is Not The Same as a Proof of Funds Letter
When buying a house, a preapproval letter is almost always a requirement. Pre-approval letters state that a home buyer is qualified to get a mortgage for a specific sum of money. They are used to prove to a seller that a buyer is financially qualified to purchase.
Lenders will preapprove buyers based on their income, debts, and credit scores. Using this information, the lender can qualify for a maximum mortgage amount.
Often, preapproval letters will only state a buyer is qualified to purchase a certain amount based on the property they're interested in purchasing.
For example, a buyer could be qualified to purchase for a much higher figure than what the letter states, but because the home's purchase price is much less, the letter will only cover that amount.
What is Included With a Proof of Funds Letter?
A Proof of Funds letter should have the following information included:
- Your lender's name and address on their letterhead
- A bank statement, either printed at a branch or an online statement
- The total account balance
- Any balance of funds in accompanying savings or checking account
- Sometimes it may require a signature from an authorized bank employee or notary public
- The date the funds were in the account
When Are Proof of Funds Letters Common?
In extreme seller's markets, proof of funds letters are far more commonplace. There are far more cash buyers when the real estate market is hot. Buyers will pay cash far more frequently to make their offer more appealing to a home seller.
When paying cash, there are far fewer financial worries on the owner's part. When there is a mortgage contingency clause, several things can happen that could derail the purchase of the property.
When there is mortgage financing, the lender will have the home appraised by a licensed appraiser. If the appraiser comes in with a lower value than the purchase price, the sale could fall unless the buyer waives the appraisal.
When there are bidding wars, there is an increased chance of there being an appraisal gap. Cash buyers become very appealing because of the lack of appraisal issues.
Even if there was no appraisal problem, a buyer who needs mortgage financing might not get the loan. There could even be something tragic happening, like the buyer losing their job a week before the closing. A cash sale takes away all of these issues.
How to Get a Proof of Funds Letter?
Getting a proof of funds letter is as simple as calling your bank or financial institution where the money is held. Sometimes buyers may need multiple proofs of funds letters if the money is in multiple accounts.
If you have your money all in one place, you can likely get your POF within a day. If you are moving funds from one bank to another, it can take several days.
To ensure a smooth home buying process, be sure to have all your contact information updated on your POF letter. This includes your name, address, and email address.
It is important that you protect your personal online financial information, such as your account number, physical address, and any other sensitive financial information.
Never give your personal online dating information to anyone who is not intending to use it to complete a real estate transaction. Be cautious of any requests for this information that seems suspicious.
When in doubt that the person asking for the POF needs it lean on your Realtor or real estate attorney for advice.
Final Thoughts
If you are paying cash for a home, you can expect to be asked to provide a proof of funds letter. A seller's real estate agent's task is to ensure the buyer is qualified to purchase. They are a normal part of any real estate transaction where the bulk of the money comes from cash assets.
