What Is A Proof Of Funds Letter When Buying A House And Why Do You Need It?

When you are thinking of purchasing a home, there are many steps to take before you decide to make an offer. There is plenty of research to be done beforehand about which city is right for you and what neighborhood has all the amenities that you and your family may require. Of course, there is also the matter of getting all of your finances in order as this can be one of the most important and most expensive purchases of your life.

This means that you will need to first get pre-approved for a mortgage to see how much a potential lender can loan you to make the purchase. You should also have at least 5% to 20% of the asking price of a house set aside for the down payment, according to Bank of America. Plus, sellers of a home will want to see a proof of funds letter. This document proves that you have the available money in order to make a serious offer on a home, as per Corporate Finance Institute. This is crucial information to have before you make an offer on a home. It is a way of proving to the seller that you're a serious buyer. The last thing a seller would want to do is risk taking the home in question off the market if the buyer could not go through with the purchase. So let's take a look at what a proof of funds letter entails and how to get it.

The difference between a pre-approval letter and proof of funds letter

Before you begin looking for a home, two of the most important documents to have are a pre-approval for a mortgage letter and a proof of funds letter. Although they sound fairly similar, the two mean different things. In order to get pre-approved for a mortgage, you need to find a financial lender who will be willing to loan you the funds needed to buy a home. With the help of a mortgage broker, you will need to supply important information regarding your current financial situation and credit history. From there, a lender will determine how much they can loan you so that you're able to pay them back over a certain amount of years, according to U.S. News.

A proof of funds letter, on the other hand, can be obtained from your bank and will detail exactly the amount of available funds you have and from precisely which accounts in order to take care of the down payment and other costs associated with closing the sale of a home, as per Fortune Builders. If you have multiple bank accounts with a variety of financial institutions or different accounts that prove an available line of credit, then you would need to obtain separate proof of funds from each bank branch. Otherwise, to make it easier, you could consider transferring funds into one account in order to make your documentation tidier for the seller.

How to get a proof of funds letter and exactly what it should include

To get a proof of funds letter, you would need to reach out to the financial institution where your money is being held. It should be a relatively easy request and not require you to pay any additional fees. Although obtaining this document should not take too long, it is a good idea to allow for five business days just to play it safe. So it is always prudent to set this process in motion sooner rather than later, especially in a competitive real estate market where time is of the essence.

Proper proof of funds letter should be written on the official letterhead of the financial institution and include your full name, the exact amount of funds you have available, and exactly what accounts they are being held in, according to Money Tips. This document should also be signed by your bank representative and dated. It should be noted that if you have any funds tied up in stocks or other investments that you wish to use toward the downpayment of a home or to cover any other closing costs of a house, these may not show up as legitimate proof of funds. Because investments are not technically money that is available right away, you would need to cash these in and transfer them into your bank account so that they can be considered ready for use.