What is a proof of funds letter for real estate?
Why you may need this document in order to purchase a home
A proof of funds (POF) letter provides evidence you have enough money for a down payment and closing costs when you are buying a home. Proof of funds letters are also used in all-cash purchases of real estate. Realtors and sellers frequently ask for a proof of funds letter before they accept your offer.
A proof of funds letter complements a mortgage prequalification. The letter demonstrates that you can afford the down payment and closing costs. The prequalification shows you may be approved for a mortgage large enough to buy the house.
Consider including a proof of funds letter and a prequalification with your offer. Having both can make your bid stand out, because it will give the seller confidence that you have the means to buy their house.
What types of money can be used for a proof of funds letter?
Cash or readily accessible money can be used for a proof of funds letter. This can be money you are keeping in a checking or savings account, although a money market account may also qualify. The key is that the money needs to be easy to access when you need it.
This means that assets like stocks and bonds can’t be used in a proof of funds letter. You would need to sell these assets, and deposit the money from the sale into another account, first. Retirement accounts or 401Ks also cannot be used for the letter. You would need to make withdraws from these accounts, which may result in interest or penalties, then deposit the money into another account.
What information do proof of funds letters contain?
Proof of funds letters are typically written on the financial institution’s letterhead and state the total amount of funds available in the account, as well as the date these funds were made available. The letter is usually signed by an official of the institution. It’s also typical to include a bank or account statement with the letter. Since these statements can contain sensitive financial information, you may want to black out information, such as the account number, before giving it to the seller.
How do you get a proof of funds letter?
You’ll need to request a proof of funds letter from your bank or financial institution. Most of the time, banks can provide these letters in one to two business days. It’s a good idea to give them a few extra days so you have the letter when you need it.
What is the difference between a proof of funds letter and a prequalification letter?
When you are financing the purchase of a home with a mortgage, it’s a good idea to get a proof of funds and a prequalification letter. The proof of funds letter demonstrates you can afford the down payment and closing costs. The prequalification letter demonstrates that your lender may approve your application for a mortgage amount sufficient to buy the house. These two letters, together, demonstrate that you can afford the total cost of buying the home.
For example, let's say you would like to buy a house for $400,000. You're planning to make a $50,000 down payment, and you estimate that your closing costs will be $16,000. This means that you’d need your proof of funds letter to document you have $66,000 in cash available. To buy the house, you’ll also need a $350,000 mortgage. As a result, you’d want your prequalification letter to state that you can afford a $350,000 loan and qualify for approval.
If you are making an all-cash offer on a house, you will just need a proof of funds letter. This means you would want a letter stating that you have $400,000 in cash available to buy the house.
Although a proof of funds letter is not always needed to make an offer on a house, having one in hand can give you a better chance of having your offer accepted. If you need a prequalification letter for your home, start here.
Last reviewed and updated October 2023 by Freedom Mortgage.