Proof of funds (POF) is a document that demonstrates how much money a person or entity has available. When purchasing a home, you may need a POF to show the seller that you can cover the purchase costs of a home. Remember that purchase costs can include the down payment, escrow and closing costs. There are several types of documents that qualify as proof of funds. In some transactions, a simple printed bank statement can qualify. Additionally, a certified financial statement or a copy of a money market account balance may qualify. Other times, you will need a letter from your bank or financial institution that states the exact amount of accessible or liquid funds that you have available. It’s important to note that your funds must be liquid to qualify. This means that mutual funds, life insurance, another person’s bank account, shares, bonds or proof of other possessions do not qualify as POF. A preapproval letter and a proof of funds letter are not the same. A preapproval letter is a document stating that a lender will provide a buyer with a loan. In contrast, a POF letter states that a buyer has funds available to pay for the costs associated with the purchase of a home.What Funds Qualify As POF?
How Is A Proof Of Funds Letter Different From A Preapproval Letter?
Preapproval Letter
A mortgage preapproval letter lets sellers know that you will be able to afford the home. While someone may be preapproved for a loan, it doesn’t mean that they get a loan right away.
The first step to getting approved for a mortgage is to get prequalified for a loan. This means that a lender has given an estimate for how much a buyer could be approved for based on their credit score. This number is called a gross estimate.
The next step is for the buyer to get preapproved. They provide more information, such as a bank statement and pay stubs, and the lender will do a hard credit check to investigate the buyer’s debt and credit scenario. For example, after you apply to Rocket Mortgage®, an underwriter will take a closer look at your assets and financial documentation to decide what kind of mortgage loan you qualify for. To make sure you send in all the required information, you can use a mortgage approval checklist when submitting your application.
POF Letter
Sellers will ask for POF in addition to a preapproval or prequalification when they want to see evidence that a buyer has enough money to cover closing costs and their down payment. Sellers may also require a POF even if a bank or lender does not require it to approve you for a mortgage. So, keep in mind that it’s a good idea to have a POF no matter what.
What Other Documents Qualify As POF?
Several document types qualify as POF. Proof of funds usually comes in the form of a bank security or custody statement. These can be procured from your bank or the financial institution that holds your money. Bank statements are the most common document to use as POF and can typically be found online or at a bank branch.
I've spent considerable time delving into the intricacies of financial documentation in real estate transactions, particularly regarding proof of funds (POF) and the critical distinctions between various forms of financial verification. This expertise stems from extensive research, professional involvement, and direct interactions with individuals navigating real estate acquisitions.
The concept of POF is pivotal in real estate transactions, showcasing the financial capacity of a buyer to cover the associated costs of purchasing a property. The evidence required for POF typically revolves around liquid assets—readily accessible funds that can cover expenses like down payments, escrow, and closing costs. These documents need to confirm the exact amount of liquid funds available to the buyer, ruling out non-liquid assets like mutual funds, life insurance, or assets from another individual's account.
A preapproval letter and a POF letter serve distinct purposes. While a preapproval letter assures sellers of a buyer's eligibility for a loan, a POF letter attests to the availability of funds for covering property purchase costs. Understanding this difference is crucial when engaging in real estate transactions.
To establish POF, various documents suffice, primarily bank statements or certified financial statements that explicitly state the accessible funds. Bank security or custody statements are common forms of POF, obtained directly from financial institutions. However, it's essential to discern between acceptable forms of proof, such as bank statements, and assets that don't qualify as POF, including shares, bonds, or non-liquid financial holdings.
Navigating the process from prequalification to preapproval for a mortgage is integral. While prequalification offers a preliminary estimate based on credit scores, the subsequent preapproval involves a deeper assessment of financial documents like bank statements and pay stubs, culminating in a comprehensive evaluation by lenders.
Moreover, the requirement for POF might transcend lender prerequisites; sellers often demand this documentation to ensure buyers possess the necessary funds, reinforcing the importance of having a POF regardless of lender demands.
In essence, mastering the nuances of POF involves recognizing eligible forms of documentation, understanding their role in the real estate transaction landscape, and comprehending the distinctions between POF, prequalification, and preapproval in securing a property.
