New investors and sometimes intermediate real estate investors tend to learn as much as they possibly can about investing in real estate and afterwards, they go out and put their education to practice only to run into a few small roadblocks that could be avoided. One of the blocks a new investor may run into is obtaining a “Proof of Funds” letter when attempting to purchase a property. What is a proof of funds document and how can it be obtained?
What is Proof of Funds Letter(POF)?
A POF letter is a document that is given to an investor from a third-party company that verifies and provides validation to a seller of a property that the funds to purchase their property are available and ready to be used toward the purchase. In other words, a proof of funds letter is validate to a seller that you have the funds to purchase their property. It ensures the seller that you are not wasting their time because the seller wants to know that if you are interested in purchasing the property, you have the money to back up your offer.
Most of the time, if you are purchasing a property directly from a homeowner who is not being represented by a real estate agent, you will not need to provide POF letter. However, if a homeowner requests that you provide proof that you have the money to purchase their property, you will need to provide them with the proof of funds letter, or a bank statement showing sufficient funds available. When purchasing a property from the MLS, auction, or purchasing any property that is listed by a real estate agent regardless if it is an REO, short sale, HUD, or a regular homeowner using an agent to sell their property, you will always need to provide a proof of funds letter along with your submitted offer. Agents will not accept your offer or even take you seriously without one.
Who Needs Proof of Funds Letter?
Most of the time, as a new investor learning to find, make, and close deals, you learn how to deal directly with homeowners. However, if you are interested in purchasing a home that is bank owned, real estate owned, or listed on the MLS in any way, you will have to go through an agent. There are also some wholesalers who have had bad experiences with other investors and may require proof of funds letter before allowing you access to the property that they have under contract.
How to Obtain a Proof of Funds doc or Letter to Get a Mortgage for a home
There are several ways to obtain a proof of funds. Most Hard Money lenders or Transactional Funding companies can provide a proof of funds for you. If you already know where you will apply to receive a hard money loan, you can most likely contact the lender and let them know that you will need a proof of funds letter. Lenders with a website often times have a link to easily request proof of funds letter that you can click and receive in a matter of minutes. Other lenders will need you to call them or email them to request a letter, then they will have to produce one for you which may take up to 24-48 hours to receive. Also, some hard money lenders may need to do some underwriting before producing a proof of funds letter. Some hard money lenders may allow you to have a proof of funds letter free of charge and some may charge you a small fee. There are websites that may offer unlimited proof of funds letters for a small monthly fee. As far as obtaining proof of funds letter online, we trust and recommend FundThisWholesaler.net. Fund This Wholesaler offers proof of funds for $1.99 per letter or $9.99 per month for unlimited letters. When requesting proof of funds letter online or directly from a Hard Money lender, there is required information needed before you receive the letter. Information such as your company name or the name of the person purchasing the property (Some lenders require you to have a company, some may not). You will also need to provide the sellers name, the address of the property, how much is needed to purchase the property, and contact info such as your phone number, email, and sometimes residential address. There is no such thing as a generic proof of funds letter, and if you happen to come across one, no agent is going to honor it and will not take you seriously.
Another way to obtain proof of funds is by providing the listing agent your very own bank statement. This is only acceptable if you actually have enough funds in your bank account to purchase the property. Bank statements show the amount of money in your account and that is proof that you have funds to purchase a property. Before submitting your bank statement as proof of funds, be sure to black-out your account number or any other personal information that you do not want to disclose. The statement must be in the name of the LLC or one of the owners of the LLC making the offer.
Banks might be able to produce the letter for you. If you go this route to obtain your letter, make sure that the letter is written on bank letterhead, have it signed by a bank official, and make sure that the letter states that you have the specific dollar amount needed to purchase the property in your account or accounts.
Whichever route you go, your proof of funds letter should look similar to the following sample proof of funds letter:
sample Proof of Funds Letter template
[Financial Institution or Bank’s Letterhead must be used here]
To whom it may concern,
We confirm, that _____[Name of Company / Individual]______ has available the sum of __________ as of this date. We confirm that these funds are fully free of any liens, debts and/or encumbrances and are clean, clear and non-criminal origin and are available in the form of ____________________. Should you require verification of the above mentioned funds, please contact us at your convenience.
Yours truly, _________________ _________________
Authorized Officer_________________ Date
Contact Info:___________________________
Remember: It only needs to indicate you have enough money, it is not unethical to ask the person signing this document to show you have just enough money for the acquisition of down payment. Now is not the time to show off your savings.
Are some proof of funds letters better than others?
After learning what proof of funds are, what they are used for, and the many ways that it could be obtained, one may ask “Are some proof of funds better than others”? Obviously, the best proof of funds letter are actual financial institution or bank statements. If you are making cash offers with bank statements (could also be line of credit statements) to back them up, you are in the best possible position to having your offers accepted. Proof of funds letter from hard money lenders are second best, because they will typically add a line stating that their approval is contingent on further underwriting. This ensures that they are not committing to the deal before doing their due diligence. Banks have become accustomed to receiving bogus proof of funds letters from wholesalers trying to wholesale property with no intention of closing, so they will most likely verify the letter. If you are using one from the web, with no formal relationship to the entity providing the letter, be prepared for the possibility that your offer might get rejected of they can’t verify the proof of funds letter. The only real reputable companies to obtain proof of funds is from a company you trust, a company recommended from a fellow investor, from a lender who you have a relationship with, or from a bank in which you have funds available. Proof of funds could also be known as VOD (Verification of Funds) and some may even use the term “Pre-Approval” even though a pre-approval and proof of funds are two completely different documents. If someone asks you to provide a pre-approval letter, please make sure to clarify as to what they mean.
You should automatically know that when submitting offers to a real estate agent that you will need to submit proof of funds, so in any case, if the agent asks for a pre-approval letter, you may want to ask if they mean pre-approval or if they meant to ask for proof of funds. A pre-approval letter is a statement prepared by a Broker or lender stating that you qualify to borrow money from a lender and that if all information stays the same the lender will lend the buyer money secured by the property to complete the transaction. A pre-approval letter is given to someone applying for a conventional mortgage. Whereas a proof of funds is given to someone who is using someone else’s money as credit to purchase the investment property where the credit is based solely on the investment property. The pre-approval letter shows that you are approved to obtain a loan up to a specific dollar amount that is not yet available and a proof of funds letter shows that you already have funds that are already available.
Now that you know how to obtain proof of funds, you will not run into that roadblock the next time you plan to purchase a property through a real estate agent or auction. Plan now and prepare for where and how you will go about getting your proof of funds letter so that when the time comes, you will not have to search around wondering where you will get one.
Things to Watch For in the Letter and bankrate information
- Ensure the person signing your proof of funds is an authorized bank employee
- They are a bank or financial institution
- Checking account / savings account / mutual funds account / money market account balance does not matter
- any bank account will be fine
- for so long as there is enough money in the account
- Be aware of the down payment and the closing costs
- closing costs, you mut be aware of this cost before you begin and how you are able to wrap it into the loan if possible
- down payment, what percentage must you have liquid at the closing table
- Not all validation letters should include bankrate