Proof of Funds Letter for Real Estate
In real estate, buying and selling property is done using many different purchasing scenarios. Most real estate transactions are for large amounts of money. Real estate sellers want to know the buyer can pay for the property before signing any sales agreements. A Proof of Funds letter demonstrates to the seller that the buyer is able to pay for the purchase. Very few real estate deals go through without a Proof of Funds Letter being provided early on in the purchase process.
What is a Proof of Funds Letter?
A Proof of Funds Letter provides evidence of a buyer’s ability to purchase real estate. It is an important step in any property purchase transaction. Due to the large amounts of money involved in a real estate transaction, sellers don’t want to waste their time on buyers that don’t have their funds in order. The Proof of Funds Letter lets the seller know the buyer is prepared and ready to finish the deal and pay for the purchase. For real estate sellers, the Proof of Funds Letter is a required part of every transaction and it should be provided by the buyer as soon as negotiations for the property get underway.
Who Needs a Proof of Funds Letter?
Real estate sellers ask for a Proof of Funds Letter to ensure the buyer is capable and ready to go to the next step in a real estate purchase transaction. There’s no sense preparing documents and performing other costly and time-consuming tasks if the buyer of the property isn’t able to close the deal. Proof of Funds letters are used for other types of transactions like stock trades, immigration, and other financial activities. A request for a Proof of Funds Letter is seen as a necessary step for all real estate transactions.
Why You Need a Proof of Funds Letter
Real estate buyers need a Proof of Funds Letter to demonstrate their readiness to proceed with a property purchase. When a real estate seller wants to know if the buyer is ready to complete the transaction they will often ask for a Proof of Funds letter from the resource funding the purchase. Mortgage companies, banks, and other financing institutions for real estate provide Proof of Funds letters once the funding package has been set up.
What is Contained in a Proof of Funds Letter
There are specific items that should be contained in the text of the Proof of Funds Letter. The document must be authored by a third party to the transaction using official letterhead and containing signatures of corporate officers or other authorized agents empowered to provide evidence of account balances. Those items include:
- Funding source name and contact information
- Official letter from funding source with authorized signature and date
- Copy of account statement with funds on deposit
- Certified Financial Statement of buyer
Many real estate sellers will make contact with the account holder to verify the funds are still on deposit and have not been transferred to another account after the account statement was produced.
Is a Proof of Funds Letter the Same as a Pre-Approval Letter?
No, a Pre-Approval Letter is different from a Proof of Funds Letter. Pre-Approval indicates the buyer has qualified for making a real estate purchase up to a pre-determined amount, but it is not provided for purchasing a specific property. Pre-Approval lets a real estate buyer know how much property they can purchase given the amount of money they have available for a down payment for buying real estate. While a Pre-Approval Letter is useful in real estate transactions, it only indicates a range of values for property purchases. Qualification for a loan is not the same as having received the funds to finalize the purchase.
How to Get a Proof of Funds Letter
Proof of Funds letters can be obtained from banks, mortgage companies, private lenders, and other resources that can capitalize a real estate purchase. Most financing organizations and individuals know and understand what a Proof of Funds Letter is and what it is used for. Requesting a Proof of Funds Letter is a common practice and is easily fulfilled. Listed below is a recommended format for a Proof of Funds Letter on company or organization letterhead:
- Name of Funding Resource (Bank, mortgage company, private individual, finance company)
- Address, telephone, email contact information
- To Whom It May Concern,
- This Proof of Funds Letter and attached financial documents are provided to certify that (name of the buyer) holds (account balance) in an account to purchase real estate property identified as (name or address of the property being purchased).
- Attached please find the account statement(s) identifying the amount(s) contained in the accounts held by (buyer’s name).
- Please contact (name of funding agent) if you require further information or have any questions.
- Signature of Agent
- Title of Agent
- Corporate Seal (if available)
What Qualifies as Proof of Funds?
Money deposited into a bank account qualifies as proof of funds. Certain Credit Lines and Money Market accounts can qualify as Proof of Funds available for a real estate purchase. Other accounts like Mutual Funds and stock holdings don’t qualify as proof of funds as their value can fluctuate over time. Those assets must be cashed-out and deposited into a bank account before they will be able to be used for a Proof of Funds Letter. Generally speaking, only liquid assets can be used for Proof of Funds Letters and not any assets that can change in value or that are not directly under the control of the property buyer.
Do I Need a Proof of Funds Letter When Using Hard Money?
Yes, a Proof of Funds Letter is still a requirement when using money from a hard money lender. The lender must be able to provide the capital and have it in place in a bank account as verification the money is available for the real estate purchase. Hard Money lenders normally accept real estate as collateral on loans and they understand the need and use of a Proof of Funds Letter. Obtaining funds from a Hard Money lender can be complicated as the funds are to be used to acquire the real estate used as collateral. Transferring funds into an account to purchase the property will most likely involve an escrow arrangement to satisfy all the parties that the funds are in place for the purchase.
Can I Use a Proof of Funds Letter at an Auction?
No, a Proof of Funds Letter can not be used at an auction. Auctions are conducted using cash and real estate auctions are like any other auction. A buyer can get a good deal at an auction but they have to pay cash upon buying the property so Proof of Funds Letters don’t work in an auction situation. Many real estate auctions conducted by municipalities and government offices require a Proof of Funds Letter be submitted to qualify as a bidder at the auction. In most cases, real estate purchases at auctions must be paid with certified funds or Cashier’s Check.
Do I Need to Have a Specific Property in Mind to Get a Proof of Funds Letter?
No, the Proof of Funds Letter does not have to specify a particular property to be purchased. While most real estate sellers would like to have their property as the only property under consideration, the fact is a buyer could be interested in more than one property. In these cases, buyers only need to demonstrate the financial ability to close a property purchase with available cash assets. Some real estate sellers may require a Proof of Funds Letter with a specific property listed on it as opposed to a general statement of available funds.
Do You Always Need a Proof of Funds Letter When Paying Cash?
Even when paying for a real estate purchase in cash, it is still a good idea to let the seller know the funds to complete the purchase are readily available. Proof of Funds Letters can help in the negotiation phase of a real estate purchase because it lets the seller know the buyer is serious and able to pay for the purchase immediately. Many real estate agents and sellers use a Proof of Funds Letter as a qualification tool when selling a property to multiple buyers. The Proof of Funds Letter legitimizes property buyers and eliminates risks for property sellers.
Proof of Funds Letter Allows the Real Estate Deal Go Forward
The use of Proof of Funds Letters goes back in time a long way. Real estate sellers and buyers have been using Proof of Funds Letters as an important component to a real estate sale because it qualifies the buyer to the seller and lets the seller know the buyer is serious about purchasing property. As a routine part of the purchasing process, it is customary and usual to provide a Proof of Funds Letter during the purchase process. It is regarded as standard protocol in a real estate transaction and should be employed for all real estate transactions.