When purchasing a home, it is critical to understand what may be required. To acquire a mortgage, you’ll need to produce specific paperwork, but did you know you may also need to provide a Proof of Funds letter to the seller?
What Does Proof of Funds (POF) Mean?
Proof of funds is basically a letter that’s sent to the seller’s bank or financial institution. The POF letter is intended to show the seller that you have funds available to complete the purchase of their house.
How Does A Proof Of Funds Letter In Real Estate Work?
Proof of funds is a method of establishing the buyer’s ability to pay. By submitting proof of funds, the buyer is telling the seller that they have the assets to complete their house purchase. In other words, the POF letter shows the seller that you have enough money – from either your personal savings, or funds from a financial institution – to complete the purchase of their house.
Why Do You Need A Proof of Funds Letter?
The need for a proof of funds letter is required by some sellers, but other sellers won’t require one. Because this is a letter that shows the seller that you have funds to complete the purchase of their house, a proof of funds letter is required in some instances.
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Today's Mortgage RatesIn some instances, this letter is used as a protection to protect the seller. The proof of funds letter is also proof of your ability to pay.
If you are unable to provide proof that you have the funds to complete the purchase of the house, then the seller can back out of the offer they accepted. However, this letter can also be used to simply show the seller that you are able to pay for their house and there won’t be any potential issue.
Who Needs a Proof of Funds Letter?
In some instances, a proof of funds letter is required. However, in other instances, the letter may be an optional component of the mortgage process. You’ll need to check with your lender to see if you’ll need to provide a proof of funds letter.
Difference Between a Preapproval Letter and a Proof of Funds Letter
The difference between a proof of funds letter and a preapproval letter is that a POF letter is required by the seller. A preapproval letter is not required; it simply shows the lender that you can pay for the house. To obtain a preapproval letter, you simply fill out an application, and then you will be provided with a preapproval letter.
By getting a preapproval letter, you are going one step further in the process. A proof of funds letter is not required, but a POF letter must be provided to the seller to complete the purchase. A preapproval letter shows the seller that you are able to pay for the house.
How to Get a Proof of Funds Letter
The best way to receive a proof of funds letter is to apply for a mortgage. When you submit an application for a mortgage, your lender will take a look at your income and assets, and make a decision about your loan-to-value ratio. Essentially, your lender is deciding how much you’ll be able to pay for a house.
The lender will then determine whether you’ll need to provide a proof of funds letter. If you do, then the lender will furnish you with this letter. The lender will contact the bank or financial institution and obtain the funds that you have available.
The Bottom Line
Be sure to ask about a proof of funds letter when applying for a mortgage. If you are required to provide a proof of funds letter, then you will need to submit this letter to the bank or financial institution of the seller before you can complete the purchase of the house.
If you’re buying a house for the first time or have other mortgage needs, MidAmerica Bancorp, Inc. can help you. We offer a range of mortgages with low down payment options. We are licensed in the following states: Illinois, Indiana, Florida, Michigan or Wisconsin. Get in touch with us at (708) 237-4050.
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