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For most of us, buying a house is the largest purchase we’ll ever make. With that in mind, it’s no surprise that the process requires quite a bit of paperwork, including the proof of funds letter.
So what’s a proof of funds (POF) letter?
A proof of funds letter essentially helps you show sellers that you have your home financing ready to go. More specifically, a proof of funds letter is a document that shows the amount of cash you have on hand for buying a home. That way, it’s clear to the seller that you can actually afford to purchase their property, giving them certainty that you’ll be able to complete the sale without a hitch.
You’ll typically need to get a proof of funds letter as you start house hunting. That’s because the seller’s real estate agent may require that potential buyers include a POF letter with their offer. This makes it easier for them to determine if you are a serious buyer or not. For that same reason, some buyer’s agents may also ask to see a proof of funds letter before they agree to submit offers on your behalf.
In some cases, you’ll be asked to provide a recent bank statement, whether it’s in place of or in addition to your proof of funds letter. However, before you give your bank statement to another party, make sure you black out any sensitive information like your bank account number.
What counts as proof of funds?
Any money you have stashed away for your home purchase in a checking or savings account can be used for your proof of funds letter. You can also use other assets for your proof of funds so long as they are liquid assets that can be easily withdrawn. For example, an open line of credit or money market account are both fair game, while mutual funds and stocks are not.
Proof of funds letter vs. pre-approval letter
POF letters are often required regardless of how you’re financing your home purchase, whether you’re a first-time home buyer getting a mortgage for your starter home or a real estate investor buying an investment property with an all-cash offer.
However, if you’re getting a mortgage, it’s likely are your POF letter will only cover the down payment and closing costs of the transaction. To prove that you have enough financing to cover the total purchase price of the home, you’ll also need to include a pre-approval letter.
A pre-approval letter, sometimes called a pre-qualification letter, will show how much money a mortgage lender is willing to give you for your home purchase. In order to get a mortgage pre-approval letter, you’ll need to contact a lender and provide some information about your finances, like your assets, credit score, etc.
How to get a proof of funds letter
You’ll usually get a proof of funds letter from the institution where your money is being held – most often that’s a bank. As we mentioned earlier, it’s best to start the process of getting your letter before you start house hunting. That way, you’ll be ready to make an offer as soon as you find your dream home.
First, ensure that the money you’ll be using to purchase your future home isn’t locked away in multiple accounts that are difficult to access. This step can help simplify not only your proof of funds process but also your mortgage application later on. Then, contact your bank and let them know that you’re looking to buy a house soon. They can help you transfer your funds into liquid accounts, if necessary.
Once you’ve consolidated your funds, ask your bank to issue a proof of funds letter that you can use when making offers. Make sure that the letter is written on bank letterhead and signed by a bank official, and state how much money you have available in your accounts. If possible, ask the bank to list the exact amount you’ll need at closing. That way, the seller doesn’t know you can afford more than what you’re offering them.
How to get a proof of funds letter as a current homeowner
If you’re already a homeowner, your future house hunting budget is likely locked away in your current home equity. Because these funds are difficult to access, they may not count as proof of funds. If you’re worried about selling your home so you can access these funds, please consider working with Orchard.
We’ll help you find your dream home, and when it’s time to close, Orchard will buy your current home, giving you equity for your purchase. Then, we’ll list your home on the market, and when it sells to a new buyer, the additional proceeds are yours to keep.