The proof of funds (POF) letter is crucial documentation the seller will want to see before accepting your offer on their house. It’s proof that you actually have the funds to buy the house at the price you’re offering, which helps them feel confident that the sale will go through.
What is a proof of funds letter?
A proof of funds letter is a letter from your bank or financial institution that proves to the seller that you have enough money available in your accounts to fund the home sale. Remember, when purchasing a property, you'll typically need a down payment of 20% of your home’s purchase price if you want to avoid paying PMI (private mortgage insurance) and enough money to cover closing costs (between 2% and 5% of the home purchase price). This money will need to be cash or other liquid assets you have on hand, not what you plan on borrowing in your mortgage.
Who needs a proof of funds letter?
You generally need a proof of funds letter if the seller requests it. Whether you are a real estate investor buying the house in cash or a first-time homebuyer looking to buy their starter home, you'll most likely need a proof of funds letter.
There are some cases where the buyer will only ask for the preapproval letter and will waive the requirement for a POF letter. You also don’t need a POF letter if you’re financing your house with a home buyer program that covers the down payment and closing costs, like a VA loan.
Pre-approval letter vs. proof of funds letter
The pre-approval letter is more essential than the proof of funds letter if you are financing your home sale. It proves that you have the financing available to cover what money you do not have in cash or liquid assets. The bank issues a pre-approval letter as an indication that they will provide credit up to a certain amount. It is not a guarantee that you’ll get the funding though—that is determined during your lender’s underwriting process, which happens after the seller has accepted your offer on the house.
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. However, there are some circumstances where the seller won’t ask for the POF letter because the pre-approval letter gives them enough confidence.
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What counts as proof of funds?
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 if it is accessible and meets certain conditions. All the seller needs to see is that you are able to pull the money out at any time and use it.
Proof of funds letter template
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 available.
Your bank should have a template for proof of funds already available. 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 [sum] 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?
You’ll want to request your proof of funds letter shortly before you make an offer on a house. You want the letter to be as up to date as possible. You also don't know the exact amount you are going to need to prove you have available until you make your offer.
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 on what is hopefully your future home.