REAL ESTATE INVESTMENT: WHY SELLERS ASK FOR PROOF OF FUNDS

Among the concerns of sellers is the ability of the buyer that they sign the contract with will be able to close. When you try to apply for a mortgage or a loan, the seller would often require proof of funds. As the name implies, this is proof that you have the financial means to complete the sales transaction that matches the amount of your offer. This shows that a preapproval letter isn’t always enough to convince your seller. Along with the number of ways to finance your home purchase equally comes with different methods where proof of funds can be shown to your seller.

EXAMPLES OF PROOF OF FUNDS

Cash + Mortgage Approval

This is common for those who want to finance their purchase partly with cash and the other half from a mortgage. A bank statement is usually acceptable as a means to prove this. Similarly, an official statement from a solicitor confirming that a sufficient bank balance would also be enough. The amount of the offer on the home should at least be equal to the sum of the cash and mortgage approval.

Cash in Bank

This is similar to the cash and mortgage approval but this mostly applies to cash buyers. These are just bank statements and cash balances that equal to or more than the offer on the home. This should always be coupled with a letter from the buyer’s bank confirming that they have the cash balance that matches their offer.

Selling an Existing Property

It’s quite often nowadays for a buyer to fund their purchase by selling their current property. From a seller’s point of view, this opens up a bit of financial risk to the table. The reasoning behind this is that the seller is being in a chain, and if for any reason the sale of their property falls through midway, the offer no longer holds any water so to speak as they lose the ability to pay for the house they’re trying to acquire. 

DRAFTING A PROOF OF FUNDS LETTER

The letter includes the account holder’s (in this case, the buyer’s) name and the current balance of available funds signed by an official from the bank. On the official letterhead from the financial institution or the bank where the funds are should be:

• Date
• Name of the account holder
• The balance of funds on deposit

It does not differ if the proof of funds is used to prove that you have the down payment or you have the funds necessary just so you could avoid getting a mortgage, the process is basically the same. You need to make your own documentation (signed and verified by a loan officer) to further validate the proof of funds. This could be an original or online bank statement, an open equity line of credit (HELOC), or a certified financial statement.

WHAT IF YOU DON’T HAVE THE FUNDS?

It’s not uncommon for the seller to want to see proof of funds. It can be challenging to convince them to enter a real estate contract with buyers without the funds to back their purchase up. Remember, a seller who asks for proof of funds is really a question of trust. In the first place, if they knew that you were definitely going to close on the deal, they wouldn’t be asking for this. Without the funds to prove it, here are a few things that you can do.

Build rapport

What else can you do? The best way to build rapport is by meeting with the seller or their agent in person. If you’re working with professionals on this matter, what usually happens is that the money needed for the purchase would be closed in an escrow account. If that would be the case, it might take some time before it shows up on your bank account. Do the best you can to convince your seller to move forward with you in the sales transaction.

Send a Letter of Intent

A Letter of Intent outlines the terms of the prospective sale before the buyer commits to the actual purchase. This would be a great way for you to secure financing. The caveat here is that this is NOT a legally binding contract, meaning the seller can always dropship and sell the property to someone else.

Propose a Purchase Agreement

Unlike a letter of intent, this agreement is a legally-binding document. The buyer prepares the agreement which outlines the terms and conditions in accordance with their letter of intent. The effectivity of this is often due to a non-solicitation clause. This basically states that, during the contract negotiation period, the seller shouldn’t entertain any other offers from other buyers. In cases where the seller receives a competing offer, the seller informs their buyer who made the initial offer. Both parties work in good faith and use their best offers to negotiate the sale once they enter into this agreement.

It’s understandable for sellers to request for proof of funds. Both parties involved in the real estate transaction would always want to have a smooth and seamless exchange after all. It’s easy to be pressured if the seller requests proof of funding, especially if you don’t have any. But remember, this doesn’t mean that everything goes downhill. Working with our team of professionals from Strategy Properties can further help you reach your goal of purchasing your dream home. To learn more about our services, contact us at (734) 224-5454 or reach out to us via email at [email protected].