Sellers often require proof of funds from a homebuyer—whether the buyer is obtaining a mortgage or is a cash buyer. Most sellers want to see evidence that the buyer actually has the funds for a down payment and/or closing costs before agreeing to sell to that buyer. A preapproval letter isn't always enough. A buyer's word is not enough.
Learn more about providing proof of funds and what it should look like.
- A proof of funds letter effectively guarantees that a homebuyer has the resources available to make the agreed down payment and pay closing costs.
- A homebuyer may need more than one proof of funds letter if their funds are held by multiple institutions.
- The “letter” doesn’t have to be written or authorized by a bank officer. A bank statement detailing an account or line of credit will often do.
- A cash buyer must substantiate that they have sufficient liquid, available assets to cover the entire purchase price and closing costs.
What Is a Proof of Funds Letter?
A proof of funds letter provides evidence that a homebuyer has the money for a down payment and closing costs.
Any proof of funds needs to list the following items, preferably on official letterhead from the institution where the funds reside:
- The date
- The name of account holder
- The balance of funds on deposit
Whether the verification of funds is to prove that the buyer has money for the down payment or all of the cash necessary to avoid getting a mortgage, the process is basically the same.
The buyer will need to produce a document. The document can sometimes be verified by a loan officer. More often than not, the seller and the seller's agent will want to see the actual document. Here are a few sample types of documentation:
- An original bank statement
- An online banking statement
- An open equity line of credit
- A copy of a money market account balance
- A certified financial statement
Depending on how the buyer saves their money, it may be hard to provide proof of funds. If they prefer to stuff their mattress with cash, for example, that wouldn't transfer very well into a proof of funds letter. Depositing that cash into the bank might be a problem, too. Federal law requires banks to report cash deposits over $10,000 to the government.
Why Do Buyers Need Proof of Funds?
Sellers often demand proof of funds because a listing agent has most likely advised the seller to keep the home on the market until the agent receives proof of funds from the buyer.
When a buyer provides proof of funds to the seller, it gives the seller peace of mind to know that the buyer can financially hold up their end of the deal. In that case, the seller is more likely to hold the home for the buyer while the transaction finishes processing.
Above and beyond the earnest money deposit for the purchase contract, there are the funds necessary to close escrow, the balance of the down payment, and closing costs. A buyer's closing costs can amount to about 3% or more of the sales price.
What Is a Cash Buyer?
Simply put, a cash buyer is a person or entity who has cash on hand to close. There is no loan involved and no mortgage—just cash. Many buyers may consider themselves to be cash buyers, but they actually are not. People in the following situations are not considered cash buyers:
- In the process of selling stocks or mutual funds
- Holding a certificate of deposit that has not yet matured
- Borrowing money from a relative
- Refinancing a personal residence to raise the cash
- Waiting for a probate court to distribute assets
- Borrowing against securities
- Liquidating funds from a retirement account
- Obtaining a mortgage secured to the property they are buying
In other words, if the money is not liquid and readily available, then the buyer is not a cash buyer. They are making an offer that is contingent on another set of circumstances happening. Sometimes, buyers who are obtaining hard-money loans present offers as cash when they are not cash. That kind of behavior is considered deceptive at a minimum and may even violate contract law.
Accepting an all-cash offer can be attractive, because it cuts the time to close to as little as two weeks. However, a seller needs to take special care to avoid becoming a victim of a scam, and a proof of funds letter can help.