Why Sellers Demand Proof of Funds From a Buyer
Sellers often require proof of funds from a home buyer when that buyer is obtaining a mortgage. Most sellers typically want to see evidence that the buyer actually has 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.
Further, sellers typically always demand proof of funds from a cash buyer. That's 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.
Proof of Funds and the Cash Buyer
Simply put, a cash buyer is a person or entity who has cash on hand to close. There is no loan involved, no mortgage. Just cash. Many buyers may consider themselves to be a cash buyer, but they actually are not. These are buyers who are:
- 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. A buyer is a person 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 possibly violates contract law.
Evidence of Proof of Funds for Balance of Down Payment
Above and beyond the earnest money deposit for the purchase contract are the funds required to close escrow, the balance of the down payment plus closing costs. A buyer's closing costs can amount to about 3% or of the sales price.
If a buyer stuffs the mattress with cash, it may be very difficult to prove the buyer has a mattress full of cash. 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.
Any proof of funds needs to list the following items, preferably on official letterhead from the institution where the funds reside:
- Name of account holder
- The balance of funds on deposit
Whether the verification of funds is to prove the buyer has a 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, but 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:
- Original bank statement
- Online banking statement
- An open equity line of credit
- Copy of money market account balance
- Certified financial statement
Accepting an all-cash offer can be attractive because it cuts the time to close to as little as two weeks. However, sellers need to take special care to avoid becoming a victim of a scam.
Consumer Financial Protection Bureau. "Shop for Title Insurance and Other Closing Services." Accessed March 15, 2020.
Zillow. "Markets Where Buyers Are Bringing the Money." Accessed March 15, 2020.
U.S. Department of Housing and Urban Development. "What Explains Variation in Title Charges?" Page 6. Accessed March 15, 2020.
Consumer Financial Protection Bureau. "What Are Some Classic Warning Signs of Possible Fraud and Scams?" Accessed March 15, 2020.