If you were selling your home, would you want to be absolutely certain that the buyers are able to secure a mortgage to make the real estate deal go through? Of course, you would, and that’s exactly what the purpose of a “proof of funds” letter is.
Understandably, the majority of sellers will want some assurance that buyers are financially capable of getting approved for a mortgage. Many sellers will go so far as to require proof of funds from buyers so that there is tangible evidence that the buyer actually has money for a deposit, down payment, and closing costs for a mortgage.
While many buyers typically go into a real estate deal with a pre-approval letter in hand, sometimes that’s just not enough to ease a seller’s concerns. Even buyers who promise an all-cash deal will often be required to come up with proof of funds. In fact, a proof of funds is almost always requested from sellers in cases like these.
What Exactly is “Proof of Funds”?
Basically, proof of funds is a document that stipulates that a buyer is financially capable of securing a mortgage or has the funds necessary to make an all-cash purchase in a real estate transaction. Generally, such documentation is a bank statement that is verified by a loan officer or the seller and listing agent. Even if funds are apparently available, a proof of funds document will show that the money will be accessible and ready to be used to fund the purchase.
Proof of Funds For All-Cash Deals
They don’t happen all the time, but all-cash deals involve the purchase of a property with no mortgage required. Since the buyer is promising to cover the full purchase price in cash, there’s no need for the buyer to take out a mortgage.
While this might sound like the perfect scenario, there is still the possibility that the buyer is unable to come up with all the funds necessary to cover the transaction, even though the promise to pay in all-cash was made at the negotiating table. But unless the buyer has all the money they need to pay for the house in full in liquid cash, the buyer really cannot be considered an all-cash buyer until such money is available in liquid form.
For instance, buyers might have assets that add up to more than the purchase price of a home, but the money isn’t necessarily readily available. Buyers might have stocks, mutual funds, or bonds that are worth quite a bit of money, but such funds might not be accessible in time to allow a real estate transaction close. In addition, some “all-cash” buyers might be those who are borrowing the money from a family member or are waiting for the sale of another property to close before the funds are made available. Further, the buyer might be using money from a retirement account or security fund to purchase the home.
Regardless of which category the buyer falls under, the money they need to close on a deal is not always readily accessible until the cash is in their hands. In these cases, it makes sense for sellers to request proof of funds in order to ensure the money will be available for a timely closing on a real estate transaction.
Even if the money needed to make an all-cash purchase is available, a proof of funds might also help determine whether or not such funds are legitimate and not fraudulently sourced.
Proof of Funds for Down Payments
Traditional real estate transactions typically involve the approval of a mortgage to help finance the deal. Real estate is expensive and not every American has all the money in their bank account needed to cover the entire purchase price of a home. That’s the whole purpose of a mortgage.
But mortgages still require some amount of money upfront that buyers are responsible for coming up with. Down payments are part and parcel of mortgages, and the bigger the down payment, the better. In addition to the earnest deposit and closing costs required for a mortgage, the down payment makes up a big part of the mortgage approval process.
Ideally, the money that buyers put forth to cover a down payment should be easily traceable. There should be a legitimate paper trail associated with the money used to be put towards a down payment. If the buyer suddenly comes up with a stack of cash for a hefty down payment, the seller might wonder where that money came from.
The Bottom Line
Whether the proof of funds is meant to provide evidence that the buyer has the money for a down payment or an all-cash purchase, the idea is essentially the same. The buyer will need to submit a document to the seller that the money is readily available and can be easily traced to a legitimate source if such documentation is requested by the seller.