What Is a Proof of Funds (POF) Letter in Real Estate? 

One exciting step when buying a home is the requirement of proof of funds. Proof of funds (POF) is a document that demonstrates that you have the funds or ability to pay for a transaction. In the case of a mortgage, POF is usually a statement from a bank or a signed letter. Proof of funds can also be a security or custody statement. You must provide the POF document to finalize the mortgage. Banks and lenders look for this proof to ensure that the borrower is prepared to execute the transaction and that the funds are fully legitimate and accessible.

What Is Proof of Funds (POF)?

When you make small purchases, it's unlikely the lender will require proof of funds. However, for major purchases such as a mortgage, lenders require proof of funds. POF is documentation or evidence demonstrating an individual or entity has enough financial resources to cover a specific transaction or financial obligation. 

POF ensures that the buyer has legal access to the money for the purchase and that it's available. You cannot simply draft your own POF — it must come from a verified authority, such as a bank. Lenders and sellers need POF to ensure you have sufficient funds for the closing costs and down payment. 

Note that POF refers to liquid assets. You cannot use an asset like another property as POF. Likewise, investment accounts like retirement accounts, mutual fund accounts and life insurance can't be used as proof of funds. If you qualify for homeowners assistance, these funds can be used for POF. 

What Types of Funds Are Considered POF?

Proof of funds can include various forms of monetary assets such as cash, stocks, bonds, mutual funds, certificates of deposit, real estate equity or other assets that can be easily converted to cash. In the case of investment accounts, you may need to cash out after providing the POF letter if that is your primary source of funding.  

Why Is a POF Letter Necessary to Buy a House?

A POF letter assures that an individual or entity has sufficient funds to complete the transaction or fulfill their financial responsibilities. As a buyer, this is another step in the mortgage qualification process. The deal will fall through if you don't have the funds to pay closing costs or the down payment. Lenders and sellers usually require a POF to avoid issues on closing day. 

The information included in a POF letter includes: 

• Bank name and address
• Official bank statement
• Balance of funds in the checking and/or savings accounts
• Balance of total funds
• Signature of authorized bank personnel

In many cases, it will also include an official seal from the bank.

Proof of Funds Letter vs. Preapproval Letter

Proof of funds and a preapproval letter serve distinctly different purposes. A preapproval letter and a POF letter are not the same. A preapproval letter states that a lender will provide a buyer with a loan. This document is issued by the lender to the buyer. On the other hand, a POF letter is issued by a bank or financial institution to assure the lender and seller that the buyer has funds available to pay for all necessary costs to purchase a specific home.

Proof of Funds vs. Proof of Deposit

Proof of funds is also different from proof of deposit. A proof of deposit is most commonly used in commercial banking. It is the financial institution’s verification that funds have been deposited into an account. A proof of deposit also verifies where the deposited funds came from. 

When applying for a mortgage, you might need to demonstrate that the funds you transferred have arrived in either escrow or seller's account. You may also be asked to demonstrate where the funds came from, including whether they were gifts. 

POF is an initial document you'll need before finalizing mortgage approval. Proof of deposit may be required for earnest money and the final down payment transfer or closing costs. 

How to Get a Proof of Funds Letter

If you have funds in multiple bank accounts, it's a good idea to transfer all funds for the home purchase into a single account before requesting the POF. This reduces the chance you'll be refused a mortgage for insufficient funds. 

Then, you can get a POF letter from your bank or custodial account. POF statements are most commonly bank security or custody statements. You can call your bank or financial institution to request proof of funds. You may also use a bank statement as POF, which you can download online or request at a local bank. 

Example of a Proof of Funds Letter 

You could use a recently dated bank statement as proof of funds. If you request a POF letter from the bank or your lender requires it, here's a template you can use. 

The proof of funds letter will typically be printed on the bank's stationery. Then, the address portion of the letter should include the following:

• Date
• Bank’s name
• Bank’s address
• Bank’s city, state and ZIP code

To Whom It May Concern;

This letter is to certify that (account holder/homebuyer) has been banking with us since (month, year).

(Homebuyer) has (number of) accounts with our bank under his or her control with current cash deposits of $________________USD.

Should you have any questions, please contact the undersigned at (bank’s contact phone number.)

Sincerely,

Banker’s name 

Banker’s title

Banker’s phone number

Using Proof of Funds to Purchase a Home

Providing a proof of funds document is essential to close on a mortgage. In preparation for closing, transferring all funds for the purchase to a single bank account can be an important step to prepare for mortgage payments. Find tips on real estate investing, how to buy a home before selling your current home or find mortgage lenders and research rates here.

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