In any large transaction that involves a significant amount, the seller needs proof that the buyer has sufficient funds to pay for the purchase. Real estate is one of the most expensive transactions an individual or a small business owner makes. A real estate transaction involves costs, like down payment, escrow, and closing costs, which need enough liquidity. Showing a preapproved letter for a mortgage is not enough. The seller needs assurance that the buyer has legal access to sufficient funds to execute the transaction and hence requires Proof of Funds (“POF”).
Why Do You Need Proof of Funds in Real Estate?
Real estate proof of funds is needed to execute the transaction smoothly. For instance, you have been searching for a house and finally, find your dream home at the right price. The seller is at risk if he holds the property for a buyer who cannot execute the transaction. He may miss an opportunity to sell the property to a buyer with funds. The buying process is lengthy because real estate prices are heavy on the pocket.
Hence, the seller wants proof of funds as assurance that the buyer has access to adequate funds to complete the purchase. At the same time, the buyer is assured that the seller will not sell the property to another buyer.
What Constitutes Proof of Funds?
The fund amount mentioned in the proof of funds should be in savings or money market instruments. Funds in retirement accounts, mutual funds, shares, bonds, or life insurance are not considered cash funds and are therefore not included in the POF.
Even a preapproval letter for a mortgage does not qualify for POF. The preapproved letter states that the lender could approve an estimated loan based on the buyer’s credit score. The lender will later ask the buyer for more information and bank statements to do a thorough credit check and determine the exact loan amount. A real estate seller needs to know that you have liquid cash to pay the closing costs and down payment.
In some transactions, a bank statement or copy of a money market account balance issued by the bank or printed online qualifies as a POF. But in real estate, a POF letter is issued by a commercial bank or custody agent claiming that the buyer has the funds ready to execute the transaction. The POF letter includes the following:
- The buyer’s bank name and address
- Official bank statement and money market statement
- Copy of online banking statement
- Balance of total funds in checking or savings account along with the date
- Signature of an authorized bank employee or notary
Things to Consider When Getting a Proof of Fund
As POF is an essential document in real estate transactions, it is better to secure it immediately after you find the property. You can get POF in a day if all your funds are in one place. But before you visit the bank to collect POF, here are a few things to keep in mind:
- If you have money in different accounts, transfer the amount you need for the POF into a single account. You can make transfers online or through checks depending on the maximum limit. Having the required funds in one account would make it easy to get a POF.
- Before making the POF, ensure all your contact information is updated.
- POF has sensitive financial information, such as your account number, physical address and more. Beware of fraudulent requests and give this letter only to the right person. You might want to consult a real estate lawyer if you are doubtful whether the person requesting POF needs it.
Buying real estate is one of the most expensive and complex transactions an individual or an entrepreneur makes. There are several documentation requirements, and it is easy to fall prey to fraudulent activities. Before you release your life savings to buy a property, talk to a real estate expert and your estate advisory team to understand the documentation and legal procedure.
Contact McCay Duff LLP in Ottawa for Strategic Documentation Advisory and Consulting Services for you and your Business.
To learn more about how the Chartered Professional Accountants at McCay Duff LLP can assist you or your business, don’t hesitate to contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.