Why Sellers Demand Proof of Funds From a Buyer
Proof of Funds Is Another Way of Saying Show Me the Money
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 downpayment 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.
You might ask why, don't they trust the buyer? And the answer is no, they don't. We live in a digital society that says show me the money.
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. The 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 minimum, and possibly violates contract law.
A reader wrote and asked about her brother whose home had burned to the ground. All of his identification apparently was lost in the fire.
He had a big insurance settlement check which he could not deposit into a bank account because he had no identification to open a bank account. How people do not have a bank account in this day and age is beyond me, but the reader asked if he could use a newspaper article about the fire and a copy of his check as proof of funds. Yes, if the seller will accept it, definitely. There are often extenuating circumstances.
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 percent 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. Some people who keep large sums of money under the mattress aren't necessarily the type who want that money reported to the government.
Some buyers argue that proof of funds is unnecessary. Obviously, if your name is Kayne West or you are some other celebrity, you might not have to produce proof of funds, but even millionaire buyers are asked to show proof of funds.
It's not an insult; it's good business practice.
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
- 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
- Open equity line of credit
- Copy of money market account balance
- Certified financial statement
Tip: Before handing over sensitive personal information, take a black magic marker and obliterate your account number and/or Social Security number.
At the time of writing, Elizabeth Weintraub, CalBRE #00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.