Purchasing an investment property is a process that requires a lot of important paperwork. In this post, we will break down everything you need to know about one of the first documents you should have on hand when beginning the investment process: the proof of funds letter.
What is a proof of funds letter?
A proof of funds letter is a document that a borrower must acquire when looking to purchase a property to fix and flip or renovate to rent—essentially any investment property purchase where a seller needs to ensure that a buyer can financially back up their offer. The letter acts as tangible proof that the buyer has access to enough liquid cash to purchase the property.
Usually, a proof of funds letter is provided by a hard money lender, bank, or third-party company that verifies an investor’s available funds. Sellers request these documents to ensure that they are not wasting their time on an unsubstantiated offer.
Who needs proof of funds?
If you are purchasing a property from a homeowner with no agent, proof of funds is not always necessary. In most cases, however, the offer will not be considered without the right documents—though some real estate agents do give potential buyers a 24 to 48-hour window to provide proof of funds.
Why do I need a proof of funds letter?
A proof of funds letter is important for establishing a sense of trust between you and the property owner. No seller or agent will accept an undocumented financial commitment—unfortunately, your word is not enough in most cases.
What are the best kinds of proof of funds letters?
If you are using your own cash to purchase the property, the best proof of funds letter would be a bank statement. If you are not using your own cash, sellers prefer a proof of funds directly from the hard money lender who will back your purchase because they are a dependable resource for funds. A final resort would be a proof of funds letter from a company online—but because of their potentially unreliable nature, it is not recommended. To be safe, investors should stick with banks and hard money lenders when acquiring proof of funds.
What is the difference between a proof of funds letter and a pre-approval letter?
A proof of funds letter and a pre-approval letter are documents that play two completely different roles throughout the investment process. A pre-approval letter is provided by a lender and indicates that a potential borrower is qualified to receive a loan that is not yet available to them. It is a commitment between the lender and the borrower.
A proof of funds letter confirms that a lender or bank has enough cash to complete the transaction. It usually signifies the start of the underwriting and appraisal processes before the borrower’s submission of requested documents and conditions. It is not a legal commitment between the lender or bank, the buyer, and the seller.
What are common proof of funds letter mistakes?
The biggest mistake made with a proof of funds letter is not having a proof of funds letter in the first place. Proof of funds letters can quickly and easily be obtained from a lender or bank, so it is recommended to have a letter when submitting an offer on a property. As a buyer, it shows preparedness and reliability.
Another common mistake is trying to pass a hard money loan off as personal cash—meaning the money belongs to the investor, not the lender—since most investors believe that their offer is more likely to be accepted if they can provide the cash themselves. Though cash deals close the quickest, hard money loans are right behind it thanks to their flexible nature and minimal regulations. Thanks to this speed, there is typically no need to misrepresent the nature of hard money financing—especially from a reputable lender.
How do I obtain a proof of funds letter?
A trusted hard money lender can quickly supply you with a proof of funds letter. Contact the lender through their website, email, or phone number and provide the requested information—usually the name of the entity purchasing the property, the complete property address, the purchase price, and some personal contact information.
If you have enough funds in your bank account to purchase the property, you can ask your bank for a proof of funds letter or a bank statement. If using a bank statement, it is best to remove your account numbers and other personal information before handing it over to the property owner, although you’ll need to keep enough information visible to prove ownership of the account.
With proof of funds letters, make sure to request one from a lender or your bank before you write an offer on any property. Though a hard money lender can supply you with one in the same day, it sometimes takes a bank up to a week to process.
Need a proof of funds letter for a real estate investment?
Asset Based Lending is happy to offer proof of funds letters for interested real estate investors. ABL issues proof of funds letters for current borrowers, as well as other investors that are serious about closing a deal. We understand that our borrowers need to move quickly in order to close the deal, and our processing team is happy to issue these documents within 1 business day.