Why Sellers Ask Buyers to Provide Proof of Funds and What to Look for in a Proof of Funds Letter

Proof of funds is typically required from homebuyers by sellers, regardless of whether the buyer intends to use a mortgage or pay cash for the property. Before agreeing to sell to a particular buyer, the vast majority of sellers require proof that the buyer possesses the financial resources necessary to cover the down payment and/or closing costs. A letter of preapproval is not always sufficient on its own. The word of the purchaser is not sufficient. Find out more about the process of producing proof of funds, as well as what the proof should look like.

Key Takeaways

A "proof of funds" letter is essentially an assurance that a buyer has the money on hand to pay the agreed-upon down payment as well as any closing charges. If a potential buyer's money is kept at a number of different financial institutions, the buyer may be required to provide more than one proof of funds letter. There is no requirement that the "letter" be written or authorized by a bank officer on their end. Most of the time, a bank statement that shows information about an account or line of credit will do. A cash buyer must show proof that they have enough cash on hand to pay for the full price of the property and any closing costs.

What Is a Letter Used to Show Proof of Funds?

A letter proving that a buyer has the funds necessary for a down payment and closing costs can be referred to as a "proof of funds letter." Any proof that you have money needs to include the following, preferably on letterhead from the bank where the money is held:

The day of the week
The name of the person who holds the account
The remainder of the funds that have been deposited

The process is pretty much the same whether the purpose of the verification of funds is to show that the buyer has enough money for a down payment or to show that the buyer has enough cash to avoid getting a mortgage. The purchaser is going to be responsible for producing the paperwork. A loan officer might be able to verify the paperwork in certain circumstances. The actual paperwork will almost always be requested to be seen by the seller as well as the agent representing the seller. The following are some examples of different forms of documentation:

A statement from the bank in its original form
An online banking statement
a credit line for equity that is still open for use.
A record of the current balance in a money market account

A certified financial statement

It may be difficult to present proof of finances if the buyer has saved their money in an unconventional manner. If, for example, they prefer to put cash under their mattress, then that is not going to translate very well into a letter proving that they have the necessary funds. The act of depositing that cash into the bank can also present some difficulties. Federal law says that if you deposit more than $10,000 in cash, you must tell the government.

Why do buyers need to show proof that they have the funds?

Because a listing agent probably told the seller to keep the home on the market until the agent got proof of finances from the buyer, sellers often ask for proof of the buyer's financial stability before agreeing to sell their property. When a buyer shows evidence of funds to a seller, it gives the seller peace of mind since they know that the buyer will be able to fulfill their financial obligations under the terms of the deal. In this case, the seller will most likely agree to let the buyer keep the property until the transaction is finished. In addition to the down payment and the balance of the earnest money deposit for the purchase contract, there will also be additional charges associated with the closing of escrow as well as the balance of the down payment. There is a possibility that a buyer's closing costs will amount to more than three percent of the purchase price. 12

What exactly is a "cash buyer"?

To put it another way, a cash buyer is a person or corporation that has the necessary funds in hand to complete the transaction. Cash is exchanged; no loans or mortgages are necessary for anyway. However, despite the fact that many buyers believe they qualify as cash buyers, this is not exactly the case. Here are some situations in which a person can't be thought of as a cash buyer:

While going through the motions of selling stocks or mutual funds,
Being in possession of a certificate of deposit that has not yet reached its maturity stage
Borrowing money from a close relative.
Refinancing one's own home to free up extra income is one option.
We are presently awaiting the distribution of assets by a probate court.
Taking out loans against one's assets
Taking money out of a retirement account (also known as "liquidating")
They are getting a mortgage on the property that they are buying and having it secured by it.

To put it another way, the buyer does not qualify as a cash buyer if the funds are not immediately convertible into another form of currency and readily available. They are making an offer, but it is conditional on the occurrence of another set of circumstances. There are times when purchasers who are trying to obtain hard-money loans will show offerings as cash when in reality they are not. At the very least, this is a dishonest thing to do, and it may even be against the law of contracts. The closing process can be shortened to as little as two weeks if you agree to accept an offer that is contingent entirely on cash payment. Nevertheless, a seller needs to take extra precautions to prevent falling prey to a scam, and a proof of funds letter can be of assistance in this regard.