Understanding Proof of Funds

As we’ve talked about in other blog posts, accepting an offer to purchase a property is an act of faith.  In fact, it’s a lot like getting engaged to be married!  No more dating!  This is the one!

Just like a marriage engagement, a home seller is not likely to accept a proposal from a buyer unless there is a very good chance that the wedding is going to happen.  If the deal goes south at the last minute, it can certainly cost the seller time, money, energy, and even mental health before they have to start all over again looking for a new buyer.

For this reason, all sellers will require reasonable evidence that a buyer has the financial ability to pay for their purchase.  When borrowing money (taking out a mortgage), a letter of pre-approval is usually sufficient assurance to a seller that the buyer will be able to get across the finish line.  Their lender is asserting that they’ve evaluated their finances and believes there is a very high chance that they’ll be approved for the loan they need.  

With a cash offer, however, buyers will need to provide proof that they actually have the funds to purchase the property.  Sounds simple enough, but there are some important things to consider when providing this proof.  First, let’s list a few examples of forms of proof of funds: 

• A current bank statement showing a sufficient balance to cover the purchase
• A letter on company letterhead from someone at your financial institution stating that you have sufficient funds
• A statement from your investment broker showing investments valued above the purchase price.  Keep in mind that a seller COULD have concern that the investments could go down in value between the time of your offer and the closing date, unless the portfolio value is significantly higher than the purchase price. 
• A fully executed offer to purchase for your current home.  The closing date on the home sale of course needs to be earlier than the closing date for your offer to purchase.  Naturally, the further along the transaction, the more likely the seller will be to accept this as proof of funds.  For example, if the offer was just accepted yesterday, and there is still an inspection contingency, a financing contingency, or some other reason that deal could fall through, the seller may choose to not accept your proof of funds.

You may have gathered by this point that the ultimate decision on whether your proof of funds is acceptable lies with the seller.  Most sellers will have their own Realtor advising them and providing counsel on the strength or lack thereof of your documentation to protect them from taking an undue risk.

Situational awareness is always important when writing an offer, and the quality of your proof of funds becomes more important the more competition there is for a property.  If a house has been listed for 3 months, and the seller is probably thrilled to just have an offer, they may be more lenient, but more competition means more options, and it’s always possible the seller could opt for another offer with more solid financial backing.

Remember to practice good common sense:  When submitting any kind of financial statement or investment statement for proof of funds, it’s important to protect your privacy and the integrity of your accounts by redacting your account numbers and any other sensitive information.  

In addition to a cash offer, there are other times when a seller may request proof of funds.  For example, when offering to purchase a very expensive property with a mortgage, just the downpayment for the loan could be a considerable sum.  Before accepting your offer, a seller may want to see both a pre-approval letter for the mortgage AND proof of funds for the downpayment.  Don’t be offended or worried by this request.  It usually means the seller likes your offer, or they wouldn’t bother with these details!

Another, less common, instance where your proof of funds may be required is when purchasing a property owned by the municipality which needs a significant amount of work done to it before it can be occupied.  You may be required to provide proof of funds to cover the scope of work provided by the municipality.  In this case, buyers are required to show that they can not only afford the property, but to pay for the required repairs.  Municipalities will naturally have less flexibility regarding the type of proof of funds they will accept.  If you have questions, have your Realtor check with the listing contact to be sure what will be accepted. 

As with any deal, both sides need to be confident that the other is in a position to hold up their end of the bargain.  Providing proof of funds is a reasonable and necessary step in the process to moving forward with trust and security between buyers and sellers.  

Do you have any questions about proof of funds?  As always we want to hear from you!