What a Proof of Funds Is and How to Get One
Whether you’re starting the house hunting process as a potential buyer or are closing on a house, one real estate document you’ll encounter is a proof of funds. A proof of funds, also known as a POF letter, is a crucial and relatively simple step to take in your homebuying journey. This guide will provide an overview of what a POF letter is and everything you need to know about this document.
Defining Proof of Funds
Like the name implies, proof of funds is proof that you have the money you say you do in your bank account. It provides an overview of how much money or equity an individual has that can be used towards their home purchase. During a real estate transaction, proof of funds demonstrates that the homebuyer has sufficient liquid assets, or cash, to purchase a house. A POF letter is usually mandatory in an all-cash real estate transaction as a way for the buyer to prove that they have the available funds to purchase a home.
However, if you’re planning to obtain a mortgage loan, a proof of funds letter is often required by lenders. This is because the lender will want to ensure that you have enough money to cover the remaining costs of the home as well as cover the loan obligations. Buyers also use a POF letter to inform sellers that they can cover purchase costs associated with buying a new home. Purchase costs can encompass everything from a down payment, escrow, and closing costs.
Why Is Proof of Funds Important?
A POF letter gives the seller assurance that you as the buyer have the liquid assets and money you say you do. It also lets the seller know that you are a serious buyer, and can give you the edge over other buyers competing for the same home. Obtaining a proof of funds letter is especially helpful in a competitive housing market where sellers are often juggling multiple offers at the same time. By submitting this document, you can give the seller a more comprehensive look into — and some peace of mind — about your finances.
Proof of Funds in the Homebuying Process
Now that we’ve defined POF letters and how they come into play during the real estate process, here’s some common questions about proof of funds.
When Is Proof of Funds Needed?
A POF letter is most often included with your offer. It’s common for sellers to ask for POF in addition to a pre-approval or pre-qualification. Whether you’re paying in cash or getting a loan through your bank, you should be prepared to submit a POF letter to the seller when you make an offer.
To make sure that you are prepared if this happens, you can contact your financial institution ahead of time so they can start drafting the document for you. Keep in mind that it typically takes one to two days to process a request for a POF letter, although this can vary from bank to bank. It can even take up to one week to receive this document, so be sure to allow yourself sufficient time to complete this step.
What’s the Difference Between a Proof of Funds vs. Pre-Approval Letter?
Although both documents are valuable assets in the homebuying process, a proof of funds letter and pre-approval letter are two separate documents. A mortgage pre-approval letter is an official document from your financial institution stating the amount you can borrow for your home purchase. To determine the amount you qualify to borrow, a lender will take a look at your finances, including income, debt, assets, and credit history.
While a pre-approval letter indicates to your sellers that you are approved for a loan, a POF letter will inform sellers that you have the necessary funds to cover the additional costs of purchasing a home that are not covered by the loan.
Documents Required for Proof of Funds
Whether you’re a first-time homebuyer or returning buyer, this list will provide you with an overview of what information is required on a proof of funds letter.
Information Included on Proof of Funds
Proof of funds is a letter or documentation from your financial institution that provides a detailed look into your finances. Depending on the type of real estate transaction and its requirements, a proof of funds usually comes in the form of a bank statement. As a borrower, it’s helpful to familiarize yourself with the information on a proof of funds letter. This document will typically include:
- Basic personal information, including contact information
- Bank’s name and address
- An official bank statement, which can be printed off or submitted as an online statement
- The balance of total funds in all of your accounts
- The signature from an authorized bank employee or notary
How to Get a Proof of Funds
If you’re a first-time home buyer, then you might be wondering how you go about obtaining a proof of funds letter. This document can be requested from your bank or financial institution. If you have accounts at multiple banks, then use the bank where you have your main checking or savings account as they will be able to easily verify the amount of cash you have available. Your bank or financial institution might have a specific template for POF letters, so it’s worth looking into.
Keep in mind that this document often contains sensitive information, such as your Social Security number. To ensure that you are protecting your privacy, black out any details that aren’t relevant to the seller.
Buy or Sell With Aalto
Navigating the homebuying process may feel intimidating, but it doesn’t have to be — all thanks to Aalto. Whether you’re interested in selling your home or looking to start house hunting, our platform offers a simpler, low stress experience, without the need to hire a traditional real estate agent.
Aalto is the first self-service real estate platform that directly connects homebuyers and homesellers. Through our convenient platform, sellers can list their homes with a flexible and no-risk process. Meanwhile, buyers can browse exclusive homes for sale in the Bay Area and enjoy virtual tours — without the inconveniences of traditional real estate. Buyers can even look forward to saving on commission costs and receiving up to 1.5% cash back when they purchase a home through Aalto.
At Aalto, our licensed advisors work alongside homeowners and buyers to answer questions and provide expert advice step-by-step during the homebuying process. From offering insights on financing your home to helping you negotiate an offer, our experts are equipped to address any needs that arise during the real estate process. Get started on Aalto today to buy your dream home, on your terms and on your timeline.
Aalto is a real estate broker licensed by the State of California, License #02062727 and abides by Equal Housing Opportunity laws. This article has been prepared solely for information purposes only. The information herein is based on information generally available to the public and/or from sources believed to be reliable. No representation or warranty can be given with respect to the accuracy of the information. Aalto disclaims any and all liability relating to this article.