Here's what all real estate investors and homebuyers need to know about proof of funds letters, what types of funds can be used to provide proof, and how to go about getting a proof of funds letter before you submit your next offer.
It's a smart idea to be prepared to provide a proof of funds letter before you start shopping for properties so you'll have it to submit along with any offers you decide to make.
Proof Of funds Letter
What is a proof of funds letter? In simple terms, a proof of funds letter is a document that shows you have enough cash or other liquid assets to purchase a property. This document shows sellers that you're not only a serious buyer, but that you have enough money to actually follow through on the purchase. A proof of funds letter should include your name or investing entity (as the account holder), as well as the balance of cash in the account as of a specific date. It should be on a letterhead from your financial institution and signed by an official representative of that institution.
What "funds" can you use to close? Typically, a proof of funds letter is expected to show cash and/or other easily-liquidated assets that don't fluctuate much in value. So things like money market accounts count. You can also potentially use your borrowing capacity under an open line of credit as funds available to close. If your closing funds are coming from more than one account, it's acceptable in most cases to provide more than one proof of funds letter.
On the other hand, investments generally cannot be used for proof of funds. When you're applying for a mortgage, you may be able to use your investment account balances as a source of cash to close or to show that you have adequate reserves. However, a proof of funds letter needs to show a cash balance (but it could potentially be a cash balance in a brokerage account).
If you're comfortable providing it, and the seller is comfortable accepting it, a bank statement or brokerage account statement showing a balance sufficient to close on the property is completely acceptable proof-of-funds documentation. You can black out any sensitive information on the statement, such as your account number or Social Security number, in order to protect your privacy. On the other hand, many people aren't comfortable showing their bank statements to strangers, and that's where a proof of funds letter comes in. You can request a proof of funds letter from your bank where you hold your account, which should be a quick two to three sentence document that simply states that you had X balance as of X date. Allow a few days for your financial institution to process the document, but in most cases, it's a quick and easy process. Most larger banks handle these types of requests frequently and have their own proof of funds letter templates
Be Prepared is the Bottom Line for Success
A proof of funds letter is part of the typical documentation needed to complete a real estate transaction, especially if you're buying a property in cash or are expecting to make a large down payment as many investors do. It's a smart idea to be prepared to provide a proof of funds letter before you start shopping for properties so you'll have it to submit along with any offers you decide to make.