Have you been asked to provide a Proof of Funds letter by a seller and you’re not 1005 sure why they are asking for one? We’re here to clear the air on Proof of Funds letters. Even if you want to make a cash offer on a property, the seller is going to want to know that you actually have the money to back it up. This is where a Proof of Funds letter comes in.
A Proof of Funds letter or “POF” is simply a document proving the liquid cash that you have available. It could be your own assets or a letter from banks, hard money lenders, or JV (joint venture) partners who will provide you with funding.
The point of the letter is to show that you are making a legitimate offer as a buyer. In the case that multiple people are making offers, by having a Proof of Funds letter, yours may be taken more seriously. Sellers prefer to see Proof of Funds letters along with offers to ensure legitimacy since they could end up wasting their time on a high-ball offer from someone who can’t actually deliver and miss out on other legitimate offers.
Now that you know what a Proof of Funds letter is and why it is important for the real estate buying process, check out more info on them below.
Is a Proof of Funds letter required for real estate investors to buy a property?
No, a Proof of Funds letter is not always required. If you are buying from a homeowner with no agent, it may not be necessary. However, when an agent is present, and multiple offers are on the table, the agent will want to see Proof of Funds.
An agent will also be present when the property is bank owned, real estate agent owned, or is listed with multiple listing services. Agents know that not all offers are legitimate, and may not take an offer with unverified funds seriously on behalf of the seller’s best interest.
How can I get a Proof of Funds letter?
- Banks – With enough money in your account, or solid credit history and job stability, your bank can provide you with a Proof of Funds letter. Alternatively, a bank statement can be issued and used as a Proof of Funds letter if you have the cash in your account. However, if a bank statement is used, you will want to take the necessary steps to protect your personal information.
- Hard Money Lenders – Hard money lenders provide real estate investors with a Proof of Funds letter when they’re ready to make an offer on their next projects. To secure one you will need to propose the property deal to the lender, provide the lender with the name of the entity purchasing the property, and information about your financial background.
When is the right time to get a Proof of Funds?
The right time to get a Proof of Funds is before making an offer on a home or property. Depending on the type of property purchase (personal or investment), and the institution that will be providing you with your letter, turn-around time can vary from one to four business days. Although some agents may give a 24-48 hour window to obtain a Proof of Funds letter after an offer is made, it’s best to prepare yourself by getting the Proof of Funds prior to shopping and making an offer.
What qualifies as a Proof of Funds?
Proof of Funds will change depending on how you’re financing the deal. Proving your available funds is not just limited to a Proof of Funds letter. The following can sometimes also qualify as Proof of Funds:
- Paper or online bank statement
- Certified financial statement
- Copy of money market account balance
- An open equity line of credit
Is a pre-approval letter the same as a Proof of Funds?
No. A pre-approval letter is not the same as Proof of Funds. Simply put, a pre-approval letter does not signify that the buyer is in possession of the liquid cash. A pre-approval letter shows that you have an existing relationship with a lender – not that you’ve been approved for the specific deal or that you have any liquid cash. A Proof of Funds shows that you do have possession of the cash.
Is this the same Proof of Funds as a homebuyer buying a house?
The difference between Proof of Funds as a homebuyer and an investor is the percentage it will cover. Homebuyers will typically need to provide evidence of funds to cover their down payment and closing costs along with a pre-approval letter. As an investor, you will be providing the seller with proof that you can outright purchase the property from them either from their own cash or a combination of their cash and funds that a hard money lender will provide. But the importance of a Proof of Funds letter is similar in both scenarios, as they provide the seller with a sense of security and establish a level of trust with the buyer.