With today's competitive real estate market, serious buyers should have a pre-approval letter and/or proof of funds before starting their home search.
So, what are proof of funds?
When you make an offer, sellers will require you to submit proof of funds. If you're buying a house with a mortgage, it shows them that you have the cash available for your down payment and closing costs. If you're paying all cash, your proof of funds shows you actually have the money.
What qualifies as proof of funds?
- Original or online bank statements (not just a screenshot of your balance)
- Copy of a money market account balance
- Certified financial statements, such as an income or cash flow statement that's been signed off on by an accountant
- An open equity line of credit
What doesn't qualify?
- Borrowed money from a relative that isn't under your name (ex: if it's still sitting in their bank account)
- Proof of income (W-2 forms, paystubs)
In order to be valid, proof of funds should be recent, clearly show the balance, and be in the name of the person making an offer.
How much should my proof of funds be?
Your proof of funds should show that you have the cash to provide the down payment and closing costs based on your offer price.
For example, if you are making an offer on a $500,000 house and plan to put 20% down, your proof of funds should be enough to safely cover $109,000 at close -- $100,000 for your down payment, and $9,000 for an assumed average closing cost for this home price.
If you plan to make an all-cash offer, your proof of funds must show that you have your entire offer price & closing costs.
Why do sellers ask for proof of funds?
It shows sellers that you're a serious buyer who has the liquid funds (AKA cash) to deliver on the offer you're making. It gives them evidence that your offer is legitimate.
Okay, so what about mortgage pre-approval?
Unless you plan to pay all-cash, getting pre-approved is important because it gives you an idea of what you can afford. A mortgage pre-approval letter is from your lender and lists the loan amount you qualify for after thoroughly vetting and verifying your financial situation and credit rating.
With today's competitive real estate market, serious buyers should have a pre-approval letter before starting their home search.
Sellers require a pre-approval letter with any home offer that isn't all-cash, since it acts as proof you're able to get financing.
What type of pre-approval letter do I need to make an offer?
Your pre-approval letter should have your name (co-buyer if applicable), the loan amount you qualify for, date, lender name, and lender NMLS number. If there's an expiration date, your letter should still be within the valid timeframe.
Here's an example:
Please note: pre-qualification is not the same as pre-approval.
Getting pre-qualified for a loan amount is based on a quick assessment of your financial situation by your potential lender using unverified information. Pre-qualification can only be seen as the amount you might expect to be approved for.
If you're pre-approved, it means your assets and debts have been confirmed by a loan officer. Only then will they issue you a pre-approval letter, which you can submit with offers.
If you're still looking to get pre-approved and want to learn more about the process, we break down all the mortgage types and your options on our blog post, "How Much Can I Borrow?".
And, as always, if you have questions about the homebuying and mortgage pre-approval process, we're happy to help. Just send us an email or call us between 9am - 8pm at (800) 501-2077, 7 days a week.