Whether you’re trying to buy a property or sell one, you may have heard about the proof of funds letter. For both parties, the letter has different meanings. This post is specially targeted toward people who are into residential real estate. Because let’s admit it, if you deal with commercial properties, you already know all about proof of fund letters!
In this post, we’re going to dive deep into what a proof of funds letter is, why is it necessary, how you can get one, and every other bit of information that’s going to come in handy for you as a realtor, a buyer, or a seller.
What is a Proof of Funds Letter?
The name is very much self-explanatory. It’s literally a letter proving that you have the funds to complete a transaction. It mostly benefits the seller or the realtor working on behalf of the seller because it’s not ideal for them to take off the property from the market without the confidence that you can actually follow through.
The proof of funds letter also ensures that you’re on good terms with the lender about getting the money on time. It’s a two-way street and the letter has been introduced to the industry for the betterment of both parties.
The letter also makes sure that you have enough cash, liquid assets, or bank balance to complete the down payment and the closing costs. Even if you’re not into real estate, you would know that purchasing or selling a house requires moving around a lot of money in all different directions.
To make things easier for both parties, the expenses are categorized into two major sections. One is for the seller and one is for the buyer. If you’re the seller, you need proof of funds to be at peace that your buyer can keep his/her end of the bargain.
Another thing to remember is that private sellers might not ask for proof of funds from you if you’re buying their property. It’s largely because they don’t know how the real estate industry works.
But when you’re working with a middleman, i.e. an agent, you’re most likely to end up getting one. Because realtors are concerned about their reputation and their relation with the seller. They don’t want the seller to get in trouble for rushing the decision.
Why is it Necessary?
Proof of funds is generally a very important document in the real estate business. It has become standard practice for sellers to ask for documentation prior to entering into any contract with the potential buyer.
It’s especially true when a buyer makes an all-cash offer. To understand why let’s see what happens when you don’t make an all-cash offer.
First of all, the buyer needs to get pre-approved for a loan. It means that the mortgage company or any other lending service has agreed to give you the loan. In that case, you still need to show a proof of funds letter just to ensure that you have enough funds to cover the down payment.
The pre-approval letter is often enough for sellers to get into a contract with you because you’re backed up by a third-party financial service. When that’s not the case and you want to buy the property with liquid cash, you need to show them where the money is!
However, there is a common misconception among consumers that a pre-approval letter is the proof of funds documentation. That’s not accurate. You can call a pre-approval letter a soft proof of funds at best.
A pre-approval letter means the lending service has approved you for the loan. You still need to get the contract done before you actually get the money.
It means that there’s a chance that the deal might not go through. With proof of funds letters, you must have the money ready to go. Only when the seller is satisfied that you can follow through with the transaction, they’ll take the property off the market.
The bottom line is, a pre-approval letter and a proof of funds letter are very different documents. The former shows the seller that you ‘may’ get the loan from the lender if the contract goes through. But it fails to ‘assure’ the seller that you have the money to pay the down payment and other closing bills.
A pre-approval letter will never work in a scenario where a proof of funds letter is required.
What Assets are Considered Eligible for Proof of Funds?
Just because you have a lot of property and investments as a buyer doesn’t mean they will work as the proof of your capability. In fact, investments don’t even count as ‘funds’ when real estate is concerned.
So, what funds are considered eligible?
In simple terms, you need liquid assets. In other words, money. You need to have liquid money to complete all the transactions. It doesn’t matter whether you put the money in a suitcase or in a bank account!
You can sometimes use your borrowing capacity under an open line of credit. You can include more than one account in this case. The only condition is there must be as many proof of fund letters as the number of accounts you’re using.
The Two Main Types of Proof of Funds Letters
If you’re not a professional in the real estate industry, you may not know the difference. Believe it or not, we’ve already covered both of these types in this post. We just didn’t name them. So, what are the two types of POF letters?
- Soft Proof of Funds a.k.a the Pre-Approval letter
- Hard Proof of Funds
Soft Proof of Funds
Basically, the pre-approval letter is often known as the soft proof of funds. It’s the buyer’s relation with a financial institution that says they’re going to give you a certain value in the future. It’s not considered a full-proof document as there’s room for change.
It also doesn’t specify why they’re giving you the money. It’s very much like a personal loan you may take out from your local bank. They don’t know the cause for the loan, but they know you’re going to use it for ‘personal reasons’.
For seasoned sellers and realtors, a soft proof of funds won’t work. You may get away with one when you’re dealing with the seller directly. Or, a realtor who just entered the industry and trying to make his/her portfolio may agree to get into a contract with the buyer with soft POF.
If you’re serious about the property, it’s better to not rely on the soft document. It’ll enable you to secure your deal more easily and reduce any chances of mishaps in the near future.
Hard Proof of Funds
When you hear a professional say the term ‘proof of funds letter’, they’re referring to the hard ones. It can either be a fully approved loan certificate from your lending institution or simply your bank account statement.
This is where things get real. If you manage to nail the hard POF as a buyer, you can consider the deal done. Because you’ve kept your end of the bargain by proving that you have the capacity to cover all expenses as well as to buy the property as a one-off.
The hard proof of funds will specify the property details and the exact amount you’re going to get. Essentially, it’s like your bank telling you, “Hey! We’re agreeing to give you X amount of money for the Y property”.
The Catch in Getting a POF Letter
We’re soon going to get into the process of how you can get your POF letter. Don’t worry about it. But we think it’s best that you know about the drawback.
It’s very much like the primitive chicken and egg situation. To get a hard proof of funds letter from your lending institution, you need a contract with the seller.
And to get the contract done and get the property off the market, you’re going to need to show the hard proof of funds.
So, what do you do in such situations? Well, your goal is to diffuse the situation. Whether you’re the buyer, the seller, or the realtor, you need to use your wit to come up with a solution.
The first and easiest way to go is to negotiate with the seller. In this negotiation, you both need to be comfortable in the situation.
You can negotiate with the seller to agree to enter a contract with an added clause. This clause will give you the opportunity to get your proof of funds letter within a specified time frame. If you fail to comply as a buyer, the contract will be void.
You can use the same method when you’re a seller or even a realtor. It’s a perfectly valid contract. It’ll ease the conditions on both the seller’s side and your financial institution’s side. It’s a win-win situation for both.
So, your first task is to explain to the realtor or the seller that you won’t get the full loan approval unless you don’t have a contract. Sign the contract with the contingency clause and ask for about 5-7 business days.
In the meantime, allow the seller or the realtor to show the property to other buyers so that they don’t have to remove the listing from the market. It’ll comfort the seller into coming to an agreement with you as they don’t have anything to lose.
As soon as you get the contract done, rush to your financial institution and get your loan approved. Remind them of the deadline so that they can understand how important it is for you.
After you get the full approval, return back to the seller and remove the contingency clause from the contract and get the property off the market.
All there is left for all parties is to close the deal.
A helpful tip we can share is that always start your window of getting the approval at the beginning of the week. So, you and the seller won’t have to deal with holidays.
How to Get POF Letter?
Finally, we’re in the section where we’re going to learn about how to get a proof of funds letter.
The first thing to understand is that a proof of letter might not be a letter at all! It can simply be your bank statement or the balance on your brokerage account. It just needs to prove that you have the money.
As starters, you can move all of your money into one location. We live in an era where the most of us have multiple bank accounts for different reasons. It’s always better to accumulate your liquid funds into one account to make the transaction easier and more seamless.
In a more traditional scenario, you may need to get actual proof of funds letter from your lending institution. You can easily ask your bank to provide you with the letter. It’s as simple as one paragraph stating your account opening and closing balance with the seal of approval by the bank manager.
Or, you can go to your mortgage company and ask for a POF letter. You don’t have to worry about the templates and the writings of the document because financial institutions work with clients like you all the time and they have all the templates worked out.
A proof of funds letter is something you can’t get away with when doing real estate transactions. Sooner or later, you’re going to need to deal with it whether you’re a buyer, a seller, or the middleman.
So, we’ve created this guide as your road map to mastering this document. After today, you shouldn’t have any issues convincing the buyers (if you’re a seller) by explaining why it’s necessary.
And if you’re the seller, you’ll know that you should ask for a POF letter from the potential buyer to increase your chances of solidifying the deal. And even if your deal doesn’t go through, you don’t lose any time by being off the market!
Need a Realtor? (Elkhart & St. Joseph Counties – Northern Indiana)
I will help you market your home for sale and work with you to strategically price your home for the best results in this seller’s market. My marketing package, professional photos and 3D Tour/Drone Photography is second to none and among the best in the area among all other agents. I get houses sold. Just reach out to me direct by phone 574-387-2501 or email NickFoyHomes@gmail.com to get a valuation done on your home!
Looking for a home to buy? I can help you there too! We will work to get you pre-qualified with a lender first or having your proof of funds letter drawn up if you’re buying cash. Then set up showings and work with you through the offer process.
Nick Foy, Broker
RE/MAX Oak Crest Realty