Buying a house is an exciting time, but there are many hoops to jump through before the house is officially yours. The proof of funds letter is one of those small, yet crucial hoops that the seller will want you to jump through.
Proof of Funds Letter
A proof of funds letter is a letter that proves you have enough money available in your bank account to fund the sale. Remember, when purchasing a property, you'll typically need a down payment of 20% (ideally) and enough money to cover closing costs (between 3% and 4%).
The seller wants to make sure they are not wasting their time and that you have the funds available. This will make the seller feel more comfortable about accepting your offer and proceeding with the sale.
Who needs a proof of funds letter?
Whether you are a real estate investor paying cash or a first-time homebuyer looking to buy their starter home, you'll most likely need a proof of funds letter.
If you are purchasing the house with cash for real estate investing purposes, the funds letter will show that you have that rather large sum of cash available to put down on the house and that it is a liquid asset.
Pre-Approval and Proof of Funds
When making an offer on a property, you'll need to hand them two documents. The first is the pre-approval letter.
The pre-approval letter proves that you have lending available to cover what money you do not have. The bank issues a pre-approval letter as a promise that they will provide funding to you. It is not a promise of a certain amount of money. That is determined after further scrutiny into your funds by your lender.
The proof of funds letter proves that you have the rest of the money available and can move forward with the sale. The seller wants both of these documents to feel secure taking your offer and thus refusing everyone else's.
What counts as proof of funds?
Proof of funds can be in the form of a letter from your bank stating that you are in good standing with the institution and that the amount of money requested is, indeed, available. Your bank should have a template for proof of funds already available, but if they do not, we've included an outline from RehabberPro.com of what should be included in the letter.
Here is a template of what the proof of funds letter should say.
Date
To whom it may concern,
We confirm, that _____[Name of Company/Individual]______ has available the sum of __________ as of this date. Should you require verification of the above mentioned funds, please contact us at your convenience.
Yours truly,
[Authorized Officer]
Date: _____
Contact Info: __________
An alternative to the proof of funds letter is a bank statement (typically containing the last three to six months of transactions) that shows you have the money and it is available for you to use.
The proof of funds must be a liquid asset. This means it can't be in the form of stocks, bonds, or other forms of real estate—unless the real estate is a rental income. The funds can be in the form of a line of credit, however. All the seller needs to see is that you are able to pull the money out at any time and use it.
When should I get my proof of funds letter?
Because you don't know the amount you are going to need to prove that you have available, you should wait to get your proof of funds letter until right before you are going to make an offer on a house. If you are making several offers, talk to your bank. They may require a small fee for each letter.
All in all, if you have your proof of funds letter and your pre-approval letter, you should be set to make a strong offer.
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