What is a Proof of Funds Letter and Why Do You Need One?

In some home transactions, Proof of Funds (POF) is a required letter or document that verifies that an individual or entity has the funds necessary to cover the down payment, escrow, and closing costs of the sale. This differs from a pre-approval, which examines your debt-to-income ratio and ability to pay the loan.

Why is a Seller / Real Estate Agent Asking for Proof of Funds?

A POF letter serves as proof that the buyer possesses sufficient financial resources to complete the transaction. It’s typically requested by the seller.

For example, a POF letter may be required before arranging a property showing, especially in the case of cash transactions, to ensure that only serious potential buyers are considered. Having this documentation can expedite the buying process and provide sellers with confidence in your offer.

How to Obtain a POF Letter

A POF letter will reassure sellers that you have the funds needed to close the sale. In competitive markets, creating an offer with POF, a large down payment, and low concession requests can make your offer appealing.

Here are the steps to obtain a POF letter:

Contact Your Bank: Reach out to your commercial bank or custody agent to request a POF letter. Many banks have a standard procedure for issuing these documents, so your request should be easily fulfilled.
Provide Necessary Information: You may need to provide details such as your account number, the amount of funds you need to verify, and the purpose of the POF letter. This information helps the bank tailor the document to meet your specific needs.
Consider the Format: POF letters can be shared online as digital files or printed as hard copies, depending on your needs.
Types of POF Letters: The most common type of POF letter is a bank-certified financial statement.
Review and Confirmation: Once issued, carefully review the POF letter to ensure all details are accurate.

What Information is Included

The following items should be included in a Proof of Funds Letter:

Your name
Bank’s name and address
Bank statement with qualifying assets
Signature of an authorized bank employee
Date

It should not disclose the following:

Account numbers
Your ID
Your address
Other sensitive information

Qualifying/Non-Qualifying Assets

Funds must be liquid to qualify as Proof of Funds (POF). This includes cash, checking and savings accounts, and money market accounts. Mutual funds, private equity, life insurance, shares, bonds, employee or company stocks, and proof of possessions do not count as POF when purchasing a home.

Most of these items are reviewed when looking at your debt-to-income ratio so you’ll likely be familiar with what funds you have.

Proof of Funds vs Pre-approval

It’s common to need both a pre-approval and proof of funds letter, but these two documents serve different purposes. While a POF verifies that you have ready cash for closing costs, a pre-approval letter confirms that a lender has approved you for a specific loan amount.

One Step Closer To Owning a Home

A Proof of Funds letter clearly demonstrates that you are able to follow through with an offer on a home. And, it’s not difficult to get your hands on.

We can help youon your real estate journey- from applying for conventional and FHA loans to negotiating how much income you need to buy. We’re here to help you through every step on the journey to becoming a homeowner.