Real estate investors and those seeking to enter the market will at some point come across the term “proof of funds,” which is often key to property procurement. In fact, without such proof, securing the real estate may not even be possible. So, what does proof of funds mean in real estate? That, and more, are covered below.
In real estate, proof of funds (POF) is a document that shows the amount of money a potential buyer or entity has on hand. Such a document may be needed when buying the property to demonstrate to the seller, or lender, that funds are available to cover the down payment, in addition to escrow and closing costs.
Provision of a POF ensures that the purchaser has the means to complete the transaction, as well as legal access to the funds. Such funds must derive from a verified authority, such as a banking institution.
In most cases, proof of funds must mean cash or some other liquid capital. Investments such as mutual fund accounts, retirement accounts, another individual’s bank account, shares, proof of possessions, bonds, and life insurance are ineligible for POF.
Proof of funds shows the ability to pay for large purchases such as a house, where it may be required for loan applications. When buying a house with cash, a POF may be needed to prove the funds are there. Such a document may also be necessary when making a down payment in cash.
In addition, proof of funds may be required for investment opportunities. Investors may have to show their financial capacity when taking positions in certain opportunities including business purchases or private placements.
Further, those seeking a loan may have to provide the lender with proof of their ability to make payments or pay closing expenses.
Other possible uses of POF documentation include:
Some of the documents one can submit as POF can include bank statements, security statements, investment account statements, bank letters confirming fund availability, and balance certificates issued by banks. Having said that, bank statements are the most common documents to use as proof of funds and can typically be found at a banking institution branch, or online.
In general, documents older than 90 days are unacceptable, although in some situations documents may not be older than 30 days. For example, a mortgage lender may require POF documentation from the most recent month available.
There also may be requirements concerning formatting, although in general, the document must include clear, legible data including the account holder’s name, the amount of funds available, their bank account number, and bank details.
If they are clear and legible, digital, or scanned copies of proof of funds documents are in many cases acceptable. It is a good idea to verify such permissibility with the involved institution or party.
If the funds that are to be used for a property purchase, for example, are spread across multiple accounts, items such as the bank’s name and address, an official bank statement, account balances in checking and savings accounts, and an authorized bank representative’s signature will be needed for all of them. Thus, it may be easier and more efficient for all parties to consolidate funds into a single account.
In real estate, a pre-approval letter is often required by the seller or seller’s agent when buying the property.
A preapproval letter is a document that states that a lender loan is forthcoming. On the other hand, a proof of funds letter establishes that the purchaser has funds on hand to handle costs associated with the property purchase. The preapproval letter comes after providing proof of funds.
There are a myriad of ways to break into real estate, a market that remains popular for its possible secondary income streams, stable cash flow, leverage, and tax advantages.
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Proof of funds is necessary for a real estate investor to demonstrate the ability to cover costs associated with buying a property such as a house. Such expenses can include a down payment and closing costs. Sellers may require POF, even if a mortgage lender does not.
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