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Why Proof of Funds is Important

I want to talk to you about why proof of funds are so important, and how they differ from a preapproval letter.

Why Proof of Funds is Important
Sean Kostov:
Hey everyone. This is Sean Kostov, and in this video I want to talk to you about why proof of funds are so important, and how they differ from a preapproval letter.

So when we talk about proof of funds, when you’re looking to accept an offer on your home, you want to make sure that the buyer who’s making the offer is financially able to purchase your home. So if you receive an offer for $200,000 on your property, you want to make sure that that buyer has $200,000 available to them, or will be available to them within that closing timeline that they stated in their offer, or that they have the ability to obtain financing for that purchase price.

So when we look at proof of funds, typically it is some sort of documentation that shows that they have the funding readily available. So the best bet when you’re looking to get a proof of funds statement is just a traditional bank statement showing those funds within the bank account for within the last month or two. Sometimes you look at maybe a statement from an investment account. These statements can also come from family friends or family members who are planning on funding the deal, and a few other various sources. But the bottom line is you’re looking for something that shows that those funds are liquid and will be available by the time we go to closing.

Now most times when you get an offer from a buyer who’s going to be financing the property, they’ll provide what’s called a preapproval letter. So what that preapproval letter is, is just what it states in name, is a letter from the bank or the institution that’s providing the funding stating that, yes they received the information, and all the preliminary documentation from the buyer, and that from all their preliminary research, they approve that buyer up to a certain amount. So this does not mean that the bank has finalized everything and has given them the green light to close on your property. This just states that the buyer appears to be ready to purchase the property for up to that amount on the letter.

What happens after the offer is accepted is, now the bank goes ahead with their due diligence, and they collect some more documentation. They make sure that the buyers still have that funding in the account from whenever they first issued the preapproval letter, and then they have to work through their process over the next three to six weeks to get the appraiser out and go through their underwriting process, making sure that that buyer is in fact a reliable borrower and will be paying back the mortgage as is written in the terms.

So just to recap, when you get that proof of funds letter, that is guaranteed money in the bank through a statement that shows you, yes we have these funds, they’re liquid and we can close whenever we have a clear title. Versus a preapproval letter, which sometimes can be three months old. A lot of things change in that timeline, and then you’re still waiting on that institution to go through their due diligence process and make sure that that buyer is going to be a responsible borrower to them so they’re not taking on too much risk. So when you’re looking at accepting offers, always keep in mind when you’re accepting cash versus finance, proof of funds statements versus preapproval letters. Obviously the offer price is a lot of the time what somebody looks at initially, but it’s good to keep in mind those other factors, especially if you want to sell the property sooner rather than later and you can’t afford to reset after you’ve accepted an offer and it falls through because of the financing.

So if you’re ready to sell your property or you just want to talk more about the process and what goes into it, feel free to give us a call, or you could fill out a form on our website, and I’d be happy to reach out and discuss more. Have a great day.
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