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You’ve been saying no to takeout, fancy lattes, and yes, avocado toasts in pursuit of your goal: to save up for that down payment on your dream home.
The time has come, and you’re ready to start an exciting new chapter in your life – homeownership. But, before you can start the homeownership chapter, you’ll need to get a few tasks ticked off your to-do list. One of those tasks will be to show the seller that you have enough cash and liquid assets (think: assets that can be easily converted into cash) to buy their house.
A proof of funds (POF) letter is the best way to do that. Whether you’re buying a home with a loan or cash, a POF letter is one of the most important documents you’ll need to provide.
Let’s take a look at what a proof of funds letter is and how you can get one from your bank.
What Does Proof of Funds Mean?
The term “proof of funds” is exactly what you think it is. It’s proof that you have the money you say you have in your bank account(s). The letter verifies your current account balances so sellers can see that you have enough money to close on the house.
A POF letter is an official, signed document from your financial institution that certifies that you have enough money to close the deal. And by close the deal we mean to cover the home’s purchase costs.
Whether you’re looking to finance your purchase (aka get a mortgage loan) or you’re making a cash offer on a house, to officially certify your funds, your word is not going to cut it. You have to submit a proof of funds letter.
A POF letter gives the seller assurance. It’s a signal that you’re a serious buyer with the money to back up your purchase offer. Quick refresher: the purchase costs of a home include the down payment (at least 3% of the home’s purchase price) and closing fees (another 3% – 4% of the home’s purchase price).
If you’re an all-cash buyer (think: buying a house without a loan), the proof of funds letter is evidence that you can cover the closing costs and any other fees as well as the cost of the property.
In a hyper-competitive housing market, with sellers juggling multiple offers, a POF letter can increase the chances of your offer being accepted. If your offer is accepted, the letter assures the seller that it’s safe to take the property off the market.
Can I Use My Preapproval Letter As Proof of Funds?
The answer is … no. But that doesn’t mean a preapproval letter isn’t important. If you intend to make a serious offer on a home, a preapproval letter is required.
A preapproval letter demonstrates that a lender has preapproved you for a mortgage loan and has offered you an estimated amount of money to buy a home. It is not a verification of the assets you have to support the cost of the purchase.
Pro tip: Include your preapproval letter with your proof of funds letter to further demonstrate that you’re a serious buyer.
What Types of Funds Are Accepted As Proof?
A proof of funds letter details and certifies the amount of money you have in checking, savings or money market accounts. These accounts allow you to easily withdraw funds, which is important for sellers. Any money you can easily access through a line of credit can also be included.
If you have nonliquid assets, like stocks, bonds, life insurance, mutual funds, cryptocurrency or other investments, they can’t be listed on your POF letter because their value can change from day to day – and, typically, these funds aren’t as easy to access.
If you want to include any nonliquid assets in your POF letter, you’ll need to sell them and move the proceeds to a regular deposit account. Your assets will be counted as cash, and you’ll eliminate the risk of your assets losing value before you can close.
If you have money in multiple accounts or with more than one bank, consider consolidating your money into one account before requesting a POF letter. This will allow you to provide one proof of funds letter instead of multiple for each different account.
What Does a Proof of Funds Letter Look Like?
Some sellers may accept your most recent bank account statement as proof of funds, but a POF letter is a formal document on your financial institution’s letterhead. The letter generally includes:
- Your bank or financial institution’s name, address and contact information
- Name and contact information of the person or people you’ve authorized to receive the letter
- Official bank statement(s)
- The total amount of funds available to use
- Balance of funds in checking and savings accounts
- Copy of online banking statement(s)
- The date that the funds were in the accounts
- The signature of an authorized bank employee or notary (may or may not be required)
- The buyer’s name and contact information
Example of a proof of funds letter
Your bank or financial institution may use a specific template for POF letters, but here’s an example of what one looks like:
(DATE) (NAME OF BANK) (ADDRESS OF BANK) (EMAIL AND/OR PHONE NUMBER)
This letter and enclosed financial statements are to certify that (NAME OF PERSON OR COMPANY) has been a client with our bank since (YEAR) and is in good standing.
(NAME OF PERSON or COMPANY) has a total combined balance of cash deposits with our bank of USD $______. We have attached copies of the statements for each of (NAME OF PERSON or COMPANY’S) accounts at our bank.
If you require any further information or have any questions, please do not hesitate to contact us directly at (EMAIL AND/OR PHONE NUMBER).
[SIGNATURE OF BANK REPRESENTATIVE] [TITLE]
How Do I Get a Proof of Funds Letter?
To get a proof of funds letter, contact the financial institution(s) where you’ve deposited your money.
Keep in mind that your POF letter and bank statements can include account numbers, your Social Security number and other sensitive details.
To keep your personal information secure and to protect your privacy, black out any details that aren’t relevant to the seller or their real estate agent. Talk to your financial institution and ask them if any sensitive details can be left off the letter.
When Should I Get the Proof of Funds Letter?
Ideally, you’ll want to include your POF with your offer. Some buyers make an offer indicating that they’ll get proof of funds to the seller’s agent within 24 – 48 hours.
To make sure you have a POF letter on hand when you need it, contact your financial institution as soon as you know you’ll need it so that they can draft one for you.
It typically takes one to two days to process a request for a POF letter, but it can sometimes take up to a week to receive it. So, be sure to allow enough time.
The Proof Is in the Pudding
Getting a proof of funds letter is an important – and relatively easy – step to take during your home buying journey. Submitting the POF letter with your purchase offer can give you an edge over other buyers and afford your seller some peace of mind about your finances.
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The Short Version
- A proof of funds letter is an official document from your financial institution that shows you have enough money to buy a home
- The most common way to show proof of funds is a bank statement. Investments generally can't be used unless they’re cashed out into a bank account
- You should be able to receive a proof of funds letter from your bank in less than a week, usually within a day or 2