Proof of funds is a document you provide to assert that you have money on hand to cover specific expenses. Proof of funds can come from multiple sources, including bank statements or a proof of funds letter. There are a few situations where you may be asked to provide proof of funds, but this is most common in real estate transactions.
Let’s take a look at proof of funds, how it works, and what one means for you.
Definition and Examples of Proof of Funds
Proof of funds is simply the verification you provide to show you have the money required for a transaction. For example, in real estate, a seller may ask you to provide proof of funds to show that you can cover the costs of purchasing a home.
Proof of funds can be requested whether you’re opting for a mortgage or buying the property with cash; in either case, the seller and lender will want to know that you can finance the transaction.
There is more than one way you can show proof of funds. In some cases, providing your bank statements can qualify. However, be aware that banking statements convey a lot of information; if you choose to use these, you’ll want to ensure your personal information is protected.
Proof of funds applies to liquid assets such as cash or money in an account only; money you have invested or untapped equity in your home will not qualify.
You may also be able to request a letter from your bank verifying the amount of money in your accounts. A certified financial statement is another option; this document is audited and signed off on by an accountant. It includes your illiquid assets, but it’s not likely they will be counted toward your proof of funds.
Finally, if you already have a home, you might be able to open a home equity line of credit (HELOC) and use the available equity as proof of funds.
If you’re an investor, you can also receive a proof of funds letter from hard-money lenders—private entities that lend money—which guarantees that capital is set aside for funding a property purchase.
- Alternate name: POF letter
- Acronym: POF
How Proof of Funds Works
Let’s say that you’re looking to sell the home you bought five years ago. It’s a good house, but your family has grown, and you’ve decided it’s time to size up. After you’ve finished polishing up the property—adding new paint and decluttering the kitchen—your real estate agent holds their first open house. The market is hot, which means that people come flooding in. Within a week, you’ve received six offers.
You’ll need to choose which offer you’d like to accept. While this is an excellent predicament to be in, it’s certainly one you’ll need to work through. Do you want to sell to the family searching for a starter home? What about the investor wanting to gut and flip your house?
Asking for proof of funds from all the buyers—but most especially ones willing to pay in cash—can help you make your decision.
Along with personal situations, consider the value of the offers made. Let’s say that four of these offers are at list price. Another is under the asking price, and the last is well above. Your initial reaction may be to choose the offer providing the most money, which can be a good option if it’s solid.
But what if the person who’s made an offer just below the list price is also willing to pay in cash? All-cash closings can be quicker and face fewer obstacles than those relying on mortgage financing, which might value more than a few thousand extra dollars.
What Does Proof of Funds Mean for You?
If you’re selling a home, a proof of funds letter can reassure you that the buyer is serious and that their offer is a valid one.
If you’re buying a home, you may be asked to give proof of funds to verify that you can close on the house. Along with earnest money and the ability to drop any contingencies on your offer, you can use proof of funds to give yourself a leg up on the competition in a hot market.
- A proof of funds letter verifies the liquid assets needed to complete a transaction.
- In a real estate transaction, a seller may request a proof of funds letter to show that you can afford closing costs and your down payment.
- As a real estate seller, you might ask potential buyers to provide proof of funds to show they can close on the home.
- There are multiple ways to acquire proof of funds, including bank statements and an open home equity line of credit.