What's a proof of funds letter and why do real estate investors need one? Let's find out...
What Is a Proof of Funds Letter?
A proof of funds letter is simply a document that proves a property buyer has enough liquid cash to purchase a house.
Who Needs a Proof of Funds Letter?
Pretty much everyone, regardless of your financial situation. While many lenders and banks are offering opportunities to put down just 3% of a home’s purchase price, it’s ideal if you can come up with 20% toward your down payment, plus the additional 3-4% you’ll need for closing costs.
Your lender will take a deep dive into your finances to be sure you can manage the purchase of a home, but the sellers will also want to know you’re able to handle the upcoming costs. That’s where the proof of funds letter comes in to play.
Is a proof of funds letter the same as a pre-approval letter?
No. A pre-approval letter and proof of funds letter are not the same thing. A pre-approval letter is a commitment from a lender to provide a buyer with a loan. A proof of funds letter is a document that shows the amount of cash you have available to bring to the closing table.
Why You Need a Proof of Funds Letter
No seller or real estate agent will take you at your word that you have the funds to purchase a home, whether with a mortgage or outright with cash.
Whether you’re buying for yourself or planning a fix and flip, you’ll need a proof of funds letter. In fact, the proof of funds letter may be even more meaningful if you’re paying cash — not many people have the hundreds of thousands in cash required to purchase a home.
How to Obtain a Proof of Funds Letter?
Your lender should be able to provide a proof of funds letter for you; they may just need some advance notice to go through your information and get the letter ready to go. You will also need to provide some information to the bank or the lender in order for them to prepare the letter.
If you don’t want to go through a money lender, you can provide your bank statement as proof of funds. But keep in mind that this will only fly if you actually have enough funds in your account to purchase the home.
If you go this route, be sure to remove your account numbers and other personal information from the statement. Just because the seller needs to know how much you have doesn’t mean they need other personal information that isn’t necessary to the transaction. You still need to protect yourself and your assets.
What Qualifies as Proof of Funds?
Besides getting a letter from a bank or money lender to show proof of funds, there are a few other options for proving that you are able to purchase a home. The Balance recommends these other financial statements as proof:
- original bank statement
- online bank statement
- an open equity line of credit
- copy of money market account balance
- certified financial statement
Preparing to Obtain Proof of Funds
As long as you have the funds necessary to put down a decent down payment or pay cash for the house, obtaining a proof of funds letter should be fairly simple. Be sure you have all the important information ready to go for the bank or money lender. Make sure your finances are in order and that you’re able to easily answer any questions regarding your financial situation.
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This post was originally published November 2018 and has been updated and revamped.