What is Proof of Funds in Real Estate Business?

  • March 17, 2022
  • admin

In any business transaction, the seller wants to ensure that the buyer has sufficient funds to pay for a purchase. The seller needs an assurance or guarantee, known as proof of funds. Let us understand the POF meaning. 

POF is a letter or documentation certifying that an individual or a company has the financial capacity to execute a transaction. It is usually issued by a commercial bank or custody agent for large transactions such as buying a home.

So a seller will insist on a bank, custody, or security statement before entering into a sale agreement with the buyer. Proof of cash funds assures the seller that the funds are legitimate and accessible. A buyer needs this document when applying for a mortgage. 

Understanding Proof of Funds

When a buyer makes a large purchase, like buying real estate, the seller needs proof of funds. Not only does this ensure that the buyer has the funds for such a large transaction, but also that they also have legal access to it. Since this proof comes from a verified authority, like a bank, the seller knows that payment will be made once the transaction is complete. 

There are certain costs in a real estate transaction, like down payment and closing costs, and the mortgage company or the seller needs to check whether the buyer can make these payments or not. 

We must understand that in most cases, the seller needs proof of cash funds, something that can be easily liquidated. This includes the funds a buyer has in their savings account.

Funds that buyers have in their retirement accounts, mutual funds, or life insurance are not considered cash funds and will not be taken into account when estimating their ability to pay for a real estate transaction. 

Proof of Funds for a Home Buyer

Proof of funds in real estate is required by the seller of the property so that they can hold it till the transaction is complete. Without this, the seller cannot be certain that the buyer has the required funds to complete the transaction.

This puts the seller at risk since the house will not be available in the market when they enter into a sale agreement. The seller might be losing out on an opportunity to sell the house to other buyers who might have the funds to execute the transaction.

If the buyer cannot complete the transaction, the seller might not find another buyer for the property since the other buyers might have bought another home. The seller loses business if the initial buyer cannot execute the purchase. 

Requirements of Proof of Fund Letter 

Buyers have to provide a proof of funds letter to the bank. This letter helps the bank verify that the buyer has the funds they claim are available. 

The following information should be available in such letters:

  • Name and address of the bank
  • An authentic statement of the buyer’s bank account
  • Proof of balance in the buyer’s money market statement
  • Latest checking and savings account balances
  • A financial statement certified by the bank
  • Online banking statement copy
  • Letter signed by an authorized bank employee 

Benefits of POF

Here are the major benefits of a proof of funds letter:

  • The seller of the property is assured of payment and faces minimal risk
  • The buyer of the property can enter into an agreement with the seller with this letter
  • Getting a loan is easier for the buyer
  • The seller does not incur a loss by taking the property off the market
  • The transaction is completed in the minimum possible time since there is a smooth flow of funds from the buyer to the seller.

Conclusion

Proof of funds is an essential requirement in a real estate transaction. It lets the seller verify the buyer’s ability to pay for real estate transactions that involve substantial sums of money and helps the seller avoid loss of business by holding the property for the buyer. The transaction takes place smoothly, and both parties stand to gain.