Preparing a Proof of Funds Letter for Your Mortgage
When shopping for your dream home, sellers want to know you’re someone they can trust. Unfortunately, buyers often sign purchase agreements only for the sale to fall through due to a lack of funding. This happens when buyers agree to purchase a home only to discover that they don’t qualify for a loan or amount. Luckily, there are many types of home loans to choose from, granting more people access to the real estate market.
Before shopping for your dream home, you should understand mortgage requirements and the documentation you’ll need to provide to ensure you can afford to purchase property. Sellers typically like to know that you’ve already started communicating with a lender, so they may ask for mortgage preapproval letters to determine whether or not you’ve been preapproved and the amount you’ve been preapproved for.
In addition to a preapproval letter, a seller might ask for a proof of funds (PoF) letter to prove that you have enough money to purchase the home. A proof of funds letter is crucial and gives you more buying power because it shows sellers that you can afford the home and encourages them to take the next steps with you.
What Is a Proof of Funds Letter?
What is proof of funds? It’s exactly what it sounds like — proof that you have the amount of money you say you have. Proof of funds in real estate is a document that shows how much money you have available to purchase a home. Sellers typically like to see proof of funds letters, also known as verification of funds letters, to ensure you can cover the costs associated with obtaining a mortgage, such as down payment and closing costs. If you’re lucky enough to be able to pay for a house in cash, the proof of funds letter will ensure sellers that you have enough money to cover all the costs of the home.
Proof of funds in real estate can give sellers a reason to take the home off the market and sign a purchase agreement. However, it’s important to note that a PoF letter differs from a mortgage preapproval letter. The mortgage preapproval letter is a document from a lender that tells sellers you can obtain a loan when you’re ready to purchase a house. Conversely, a proof of funds letter tells sellers that you have the means to purchase a home.
PoF letters typically come from banks or other financial institutions and include essential information, such as:
- Bank name and address
- Official bank statements
- Balance of accounts
- Signature of authorized bank employee or notary
- Date of the proof of funds letter
Verification of funds letters come in a few different forms, with the most common being bank statements. However, certified financial statements may qualify depending on the seller. In most cases, you’ll need a letter from your bank or credit union that states the amount of liquid funds you have available to purchase a home.
An official bank statement is the most common type of PoF letter and allows you to verify how much money you have available to purchase a home. In most cases, you can get your bank statement PoF online or request a copy of your bank statements be mailed to you.
Proof of Funds vs. Proof of Deposit
When you buy a house, you may need proof of funds and proof of deposit. The proof of deposit letter verifies that you’ve made a down payment on a home loan. Proof of deposit letters are given to the lender so they can see that you have the money for a down payment on a particular property. It also helps them determine where the deposit came from.
For example, if your deposit was a gift or acquired through other loans, your lender can decide whether or not you have a reliable income to afford the loan. Of course, you can use a gift for a down payment if it comes from a family member or someone close to you. If you plan on using a gift as part of your down payment, you’ll need to provide a gift letter to your lender to assure them that the gift was not a loan.
The proof of deposit can help demonstrate a borrower’s ability to repay. In addition, if the deposit comes from a reliable source, such as a savings account, it can demonstrate the reliability of their income, which can make it easier for them to get approved for a mortgage.
Simply put, a proof of funds letter is for the seller to ensure you can afford to purchase a home, while a proof of deposit letter is for the lender to ensure you have a large enough down payment and that it came from a reliable source.
Why Lenders Want a PoF Letter
We’ve already discussed why a proof of funds letter is important when you’re shopping for a home. However, it’s not just the seller who may require you to have one. Lenders may require a PoF letter for one or more reasons, including:
- Proof you can repay the loan: A proof of funds letter ensures lenders that you have enough money in your bank account to afford the down payment and closing costs associated with the home loan.
- Proof you can cover the remaining costs of the home: In some cases, you might opt to take out a lesser loan amount if you can afford to pay for the home using cash. If you decide to take out a home loan, you must ensure the lender that you can cover the remaining costs of the home in cash.
- Proof of down payment: A proof of funds letter ensures lenders that you can afford the down payment, making you look like a more appealing borrower.
- First-time home buyer: Loans for first-time home buyers may require you to provide a PoF letter to the lender to ensure you can cover the down payment and potential private mortgage insurance (PMI) costs.
Not all lenders require PoF letters, especially if you’re applying for a bank statement loan. In most cases, lenders will already review your bank accounts to determine your income. Still, it’s a good idea to have a PoF letter to give you more purchasing power when shopping for homes.
How to Get a Proof of Funds Letter
A proof of funds letter is an official bank or financial institution document. You can request one from your bank at any point, and the money must come from a checking or savings account. If you don’t already have enough funds in a dedicated bank account to cover the costs of a home, you can follow these steps to get a proof of funds letter:
Open an account & move your money
If you don’t already have a dedicated bank account for your home purchase, consider moving your money to make it easier to understand your financial statements. It’s much easier to move the necessary house funds into one bank account and provide sellers and mortgage lenders with one bank statement. Additionally, it’s usually best to provide the seller and lender with one proof of funds letter from a single bank to make it easier for them to understand.
Request your PoF letter
When your funds are transferred to one bank and one bank account, you can request a proof of funds letter. You can go to your local bank branch or call them to put in the request. After contacting them, your bank should provide you with an estimate of how long it will take for you to receive your PoF letter. Some financial institutions might offer the ability to email or mail it to you, depending on your preferences.
Collect your bank statements
Bank statements are typically the easiest way to demonstrate your proof of funds. Your proof of funds letter will be enough to tell sellers and lenders how much money you have, but you’ll still need financial statements attached to the letter as additional evidence. You can get your bank statements online or request they be mailed to you.
Secure your financial information
Whether you receive a print or digital copy of your proof of funds letter, you should try to keep your financial information secure. Your proof of funds letter lists all your accounts, details the amount of money you have, your account number, and physical address. Be careful who you show your proof of funds, and only share your financial information with your real estate agent, lender, or seller.
Once you receive your proof of funds letter, you can use it to convince sellers to take their homes off the market. Armed with a PoF letter, you can make an offer on a home and provide your letter once they accept.
Continue on Your Real Estate Journey
Proof of funds letters tells lenders and sellers that you can afford to purchase a home and can streamline the purchasing process. Sellers also like to see a preapproval letter from a trusted lender to ensure you qualify for a home loan. Ensure you get these essential documents before starting your home search. Want to learn more about the home-buying journey? Learn the step-by-step mortgage process or take the next step and apply with Griffin Funding to begin the mortgage preapproval process.
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