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

Proof of Funds (POF) in real estate verifies a buyer possesses the necessary financial resources to complete a property transaction. This documentation demonstrates a buyer’s financial capability to cover expenses such as the down payment, escrow, and closing costs. Providing proof of funds builds confidence and credibility with sellers, assuring them that a prospective buyer is financially prepared and serious about the purchase.

Forms of Proof of Funds

Bank statements are a common method of proof of funds. Recent statements from checking, savings, or money market accounts are accepted. These statements should clearly display the full account holder’s name, the bank’s name, the statement date, and a sufficient balance to cover the required funds. For privacy, sensitive information like full account numbers can be redacted before sharing, while ensuring the fund amount and account holder details remain visible.

Investment accounts, such as brokerage or mutual fund accounts, can also demonstrate available funds. These need to show liquid assets readily convertible to cash. Assets like stocks or bonds need to be liquidated and deposited into a bank account to qualify as proof of funds. Retirement accounts, such as 401(k)s, and life insurance policies do not qualify directly as proof of funds because accessing these assets involves penalties or takes time to liquidate.

A formal letter from a financial institution, such as a bank, can also serve as proof of funds. This letter, on bank letterhead and signed by an authorized official, confirms the available balance in an account. Such letters state the exact amount of accessible or liquid funds the buyer has. This type of letter is considered credible by sellers.

While a pre-approval or pre-qualification letter from a lender is distinct from proof of funds, it plays a complementary role in financed purchases. A pre-approval letter indicates a lender is likely to provide a loan up to a certain amount, showing the buyer’s financing ability. However, it does not confirm the buyer has cash on hand for the down payment and closing costs, which is where proof of funds becomes necessary. Both documents together provide a comprehensive financial picture to the seller.

When Proof of Funds is Needed

Proof of funds is requested at several points throughout a real estate transaction. When a buyer submits an offer, especially for an all-cash purchase, proof of funds is expected. For cash offers, it assures the seller that the buyer can cover the entire purchase price. Even with financed offers, proof of funds is required to confirm the buyer has liquid assets for the down payment and closing costs, which can range from 2% to 5% of the purchase price.

Sellers or their real estate agents request proof of funds to verify the seriousness and financial capacity of a potential buyer. This request helps prevent offers from buyers who may not genuinely have the means to complete the transaction, saving time for all parties involved. Without this documentation, an offer might not even be considered.

Proof of funds may also confirm a buyer’s ability to cover the earnest money deposit. This deposit, 1% to 3% of the purchase price, is submitted with the offer to demonstrate commitment. While the POF is not the deposit itself, it assures the seller that the funds for this initial commitment are available.

In competitive real estate markets or with multiple offers, providing clear proof of funds can strengthen a buyer’s position. It signals to the seller that the buyer is well-prepared and poses a lower risk of the deal falling through due to financial issues. Sellers may prioritize offers with strong proof of funds over those without it.

Providing Proof of Funds

Once proof of funds documents are prepared, they are provided to the seller’s real estate agent. The buyer’s agent facilitates this exchange, ensuring the information is presented appropriately. Secure methods of sharing, such as encrypted email or secure online portals, are recommended to protect personal financial data.

Privacy is a consideration when sharing financial documents. It is standard practice to redact sensitive information, such as full account numbers, while ensuring the account holder’s name, financial institution, and total available balance are visible. This practice balances the seller’s need for verification with the buyer’s right to financial privacy.

Upon receipt, sellers and their agents review the proof of funds to confirm several aspects. They look for sufficient funds to cover the proposed purchase, a clear indication of the source of funds, and a recent date on the document (within 30 to 90 days) to ensure the funds are available. The buyer’s real estate agent guides the buyer through this process, ensuring all documentation is accurate, current, and presented to best support the offer.