What Is Proof Of Funds & Why It’s Necessary In Real Estate?
Why a Proof Of Funds Letter Is Required For Buying Real Estate
When you’re trying to buy a home, you will probably be asked to provide a proof of funds letter, commonly abbreviated POF. Provided by a bank or financial institution, the POF will guarantee to the seller that the interested buyer has sufficient funds to cover the transaction.
A POF is especially important for higher priced properties or cash offers. It strengthens your offer by acting as an assurance to the seller. Many sellers won’t accept a cash offer without a POF.
Because most homebuyers aren’t paying cash for a home, a proof of funds letter often only needs to guarantee the amount that the buyer is actually contributing, typically the down payment, which is approximately 20% of the home’s price, and the closing costs, which typically range from 3-4% of the sales price. Your Tortosa realtor will not take the home off the market until the buyer confirms their ability to purchase the home via a POF.
Why Do I Need a Proof Of Funds Letter To Buy a Home?
In an ideal world, sellers and lenders would take your word for what value home you can afford. But unless the seller knows you personally, they will probably need some proof. In an extremely competitive housing market, a POF is one of the most effective tools to add to your offer because it provides significant assurance of the likelihood of a successful sale.
Although some buyers may not be asked for a POF, many will need to provide one when they make an offer. Sellers typically prefer the POF and the offer to be together so that they can seriously evaluate your offer right away. If you provide an offer on a home without a POF, your The Villages real estate broker will likely ask you to follow up with one within a few days.
When entering into a contract together, realtors may also ask their clients for a POF even before they begin looking at a home. A POF can act as a pre-screening tool to demonstrate what type of home a client can afford so they can show the most relevant homes. Sellers can feel more confidence as well because a POF helps ensure that the interested party is actually able to purchase the property, rather than simply scoping the neighborhood for theft or just wanting a private tour of a nice home they can’t afford to purchase.
What Types Of Funds Are Needed For a POF?
The funds indicated in a proof of funds letter must be liquid capital, funds that the buyer can access and use anytime. This may include:
- Savings accounts
- Money market funds
- Line of credit
- Stocks, although in some cases the buyer may need to sell before being included in a POF due to the fluctuating prices of stock
Some types of assets do not count toward a POF because they are difficult to access, such as:
- Retirement accounts
- Mutual fund accounts
- Life insurance policies
How Do I Obtain a Proof Of Funds Letter?
It’s relatively simple to get a POF for your Rancho Mirage real estate agent. In most cases, it’s simply a signed letter from your bank that is available for free.
The typical template includes the bank’s name and address, an indication of the balance, and a signature from an authorized bank employee. If you have assets in multiple accounts, they will either need to be combined into one account, or you’ll need to provide separate information for each account.
To maintain confidentiality, the POF does not always list an exact balance. In many cases, a POF will simply confirm that the account has a specified minimum balance or that it contains enough money to cover the buyer’s portion of the home purchase without any more specific information.
What Is the Difference Between a Proof Of Funds & a Preapproval Letter?
Some people become confused about the difference between a POF and a pre-approval letter. Although they are different, both are crucial to the home buying process.
A POF letter comes from a bank and indicates that the buyer has sufficient funds in their account to purchase the home. In contrast, a preapproval letter will come from a lender, confirming that the buyer has been vetted and considered capable of repaying a certain amount of funds. Assuming that conditions are met and that the buyer’s situation does not drastically change, the lender confirms that they are ready to contribute the money to make the home purchase.
A lender will use the same screening tools that are used for other types of loans, including a hard credit check and proof of income. A pre-approval letter will detail how much money the lender is willing to loan so that a seller can be assured that the potential buyer will have the necessary financing to complete the home sale.
Buying a home involves a lot of moving pieces and documentation. That’s why working with an experienced Maricopa real estate company can be invaluable. Your real estate agent will guide you through each step of the process, answer all of your questions, and take care of the necessary paperwork to purchase your dream home.
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