In the acronym wonderland of the homebuying process, one of the items that aspiring homebuyers will find themselves being asked for is a POF, or proof of funds letter. The POF is a document, provided by a bank or other financial institution, which proves that the buyer has the funds required to cover their share of a given transaction, like the purchase of a home.
For those buyers or investors making an all-cash offer with no contribution from a lender, their share of that transaction is 100%, which makes the POF particularly important. Short of the proverbial briefcase full of cash, the seller has no guarantee that the buyer actually has the funds they say they have, unless they have a document to prove it; many sellers won’t accept a cash offer without a POF.
Of course, homebuyers who intend to use a mortgage loan aren’t putting up all of the money, so the proof of funds letter only needs to cover the amount that the buyer is personally contributing: typically the down payment (ideally 20% of the home price) and the closing costs (usually 3%-4%).
Most sellers won’t take the home off the market before confirming that the buyer has these funds ready to go.
Why is the POF Necessary?
As nice as it would be, most sellers and lenders aren’t willing to take your word for it when you tell them what you can afford. It’s easy to say that you can buy a home in a certain price range, but unless the seller knows you personally or is very trusting, they will likely need some proof. In the extremely competitive housing market, the POF is one of the best tools they have to sift through offers and determine which have the highest likelihood of leading to a sale.
While some buyers who are dealing with homeowners directly may not be asked for a POF, most will need to provide one by the time they make an offer; many sellers prefer the POF and the offer to come in together, so they can evaluate the plausibility of the offer right away. In some cases, the buyer may make an offer without a POF, but they’ll typically be asked to follow up with one within a day or two.
Realtors may also ask their clients for a POF well before they reach the offer stage, as a kind of pre-screening; knowing what a client can afford will help a realtor decide which homes to show to whom, and will help them approach sellers with more confidence in their clients.
Types of Funds in a POF
The “funds” in proof of funds can take different forms, but the most important thing is that they generally need to be liquid capital – or in other words, funds that the buyer can access and use at any time. The most common example is cash, as it can easily be transferred and doesn’t change in value.
But some other forms may be considered as well, such as:
- Money market funds
- Line of credit
- Stocks (though some sellers may ask the buyer to sell their stocks before including them in their offer, as the cash value of stock can fluctuate)
It’s important to note that certain types of assets do not count towards POF, as they can be difficult to access and sometimes incur financial penalties for early withdrawal. Examples include:
- Retirement accounts
- Mutual fund accounts
- Life insurance policies
How to Get a Proof of Funds
So what does a POF letter look like, and how do you get one?
The good news is, it’s a relatively simple process. The most common Proof of Fund is a signed letter from your bank on its letterhead, often dated the day you’re making your offer. POF letters are typically free, but some banks might require a small fee.
Most banks will have a POF template ready, which will include:
- Bank’s name and address
- Balance of funds in the buyer’s account(s)
- Balance of total funds
- Signature of authorized bank personnel
If you have liquid assets in several accounts, you’ll need to either combine them into one before obtaining the POF letter, or be prepared to provide this information separately for each account.
An important point is that the POF letter does not always have to list exactly how much money a buyer has: It could note either the full balance in their account(s), or could simply confirm that the accounts contain enough to cover the buyer’s portion of the home purchase, without specifying how much more the accounts contain beyond that. Some sellers or lenders may also accept alternatives to official POFs — most often bank statements, typically covering the last 3-6 months of transactions.
Proof of Funds vs. Preapproval Letter
A common point of confusion in the homebuying process if the difference between a Proof of Funds and a mortgage preapproval letter. While the two are not the same, neither is much good without the other.
As we noted earlier, in the case of a mortgage, the POF letter only has to cover the funds that the homebuyer is putting forward themselves. On the other hand, the preapproval letter will come from a lender, who will confirm that they’ve vetted the buyer and, deemed them capable of repaying what they borrow; the lender is therefore ready to contribute the rest of the money to close the sale, assuming certain conditions are met and the buyer’s financial situation doesn’t change drastically.
The lender makes this determination with the same financial screening tools they’d use for any other type of loan, like a hard credit check and proof of income. Their preapproval letter will specify how much money they’re prepared to put forward, so that the seller can rest assured that the entire cost will be covered. If you think of a home sale as an empty glass that needs to be filled, the POF covers the first pour, and the preapproval letter comes in to fill the glass the rest of the way.
Anyone who’s considered buying a home can agree that the process involves lots of moving pieces, including the POF. But once you break down those pieces one by one, you’ll find that becoming a homeowner isn’t as overwhelming as you thought, and that the unassuming POF can prove a powerful tool in helping you purchase the home of your dreams.
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Last Updated on February 16, 2022