So, you’ve saved up enough money to close the deal on your dream home. If you want to convince the seller that you’re the right buyer, you need some way to prove that this cash really exists. The way to do this is through a proof of funds letter. Without it, a seller won’t know whether you can afford to purchase the home.
What is a mortgage proof of funds letter?
Proof of funds letter definition
A proof of funds letter is a document providing evidence that a borrower has enough liquid assets, or cash, to buy a home. Homebuyers need this paperwork to demonstrate to the seller that they can cover purchase costs, including the down payment and closing costs. If paying for the home in cash, the buyer will need to provide proof of having access to enough money to cover the full cost of the home. Most sellers won’t take the home off the market before confirming that the buyer has these funds set aside.
How to get a proof of funds letter
Getting a proof of funds letter is fairly painless. You can obtain the letter by requesting one from the bank or other financial institution holding your money. An online or paper bank statement may also suffice. The bank should be able to get the letter back to you in less than a week, and often within a day or two.
Keep in mind that the money needs to come from a checking or savings account, but a line of credit or money market account would also qualify. You need to be able to withdraw this money easily, which means investments such as stocks, bonds, mutual funds and life insurance are excluded.
The funds also cannot be in someone else’s bank account. If you plan to use some of your non-liquid assets, you will need to divest some of them to obtain the cash.
What types of funds will qualify?
If you want to get a proof of funds letter, you need to make sure you have sufficient money. However, not all of your funds might qualify.
For example, a simple bank statement will typically qualify, however in some cases you might need even more proof. That can involve getting a certified letter from your bank describing exactly how much money you have available for the transaction.
In some cases, a line of credit might also suffice as proof of funds. However, if you’re applying for a mortgage it’s usually better not to rely on other debt to show proof of funds.
Keep in mind that your funds need to be liquid to qualify. That means that assets like mutual funds or life insurance, while they have value, may not qualify if they aren’t sufficiently liquid.
Why homebuyers need a proof of funds letter
Providing proof of funds is usually a requirement of the homebuying process. Without a proof of funds letter, your home sale could fall through.
A proof of funds letter might also give you an advantage when making an offer if multiple people have bid on the home you want. The purpose of the letter is to prove that your offer is legitimate, so by producing a proof of funds letter, you may stand a better chance of pushing your offer to the top of the list.
It may not be necessary to provide proof of funds if the home is for sale by owner and the seller does not have a real estate agent. This scenario is the exception, however, not the rule.
Difference between a preapproval letter and a proof of funds letter
A proof of funds letter is not the same as a mortgage preapproval letter, which is documentation from a lender showing they are willing to provide a loan for the balance of what the buyer will owe on the mortgage. Generally, you will need to provide both a preapproval letter and a proof of funds letter before the home sale can move forward.
Example proof of funds letter
Your bank can provide a template for a proof of funds letter, or you can find sample letters like this one from the Corporate Finance Institute online, or the one below:
[DATE] [NAME OF BANK] [ADDRESS OF BANK] [EMAIL AND/OR PHONE NUMBER]
This letter and enclosed financial statements are to certify that [NAME OF PERSON OR COMPANY] has been a client with our bank since [YEAR] and is in good standing.[NAME OF PERSON or COMPANY] has a total combined balance of cash deposits with our bank of USD $______. We have attached copies of the statements for each of [NAME OF PERSON or COMPANY’S] accounts at our bank.
If you require any further information or have any questions, please do not hesitate to contact us directly at [EMAIL AND/OR PHONE NUMBER].
Sincerely,[SIGNATURE] [NAME OF BANK REPRESENTATIVE] [TITLE]