August 27th 2021
What is a Proof of Funds Letter?
By Rachel Burke
When you approach a bank, lending institution, and even residential seller for real estate purposes, not only are you conveying your interest in buying a piece of property, but you’re also demonstrating to them that you can manage this massive financial investment. It’s about more than just dollars, cents, and credit scores; it’s about showing genuine intent, accountability, and trustworthiness. For this exact reason, Proof of Funds documentation is now a common part of closing a property deal in Canada.
What is a Proof of Funds letter?
Also known as a PoF, a Proof of Funds letter is official documentation obtained from a bank certifying that an individual or collective is in a sufficiently sound financial position to complete a transaction. This document assures the seller that the other party is currently in possession of enough money to carry out a prearranged deal. PoFs are also necessary when it comes to getting a mortgage. It’s like if you were to give an I.O.U to your childhood friend and have one of your parents sign it: there’s weight behind the document.
Proof of Funds letters are used in various circumstances to verify that an individual has some degree of financial independence or the requisite support network to see them through a large transition. In Canada, there are two major reasons why one would need to demonstrate PoF: Purchasing real estate and immigrating into the country.
PoF for real estate: As a home buyer, you’ll need to obtain a PoF from your bank to show the seller that you have enough funds in your account to close the deal. This document is separate from ones that verify your access to a homeowner’s loan; it simply displays that you have cash on hand to close the deal. It can also help you get pre approved for a mortgage by showing you have the necessary money for a down payment.
PoF for immigration to Canada: The Government of Canada also deploys Proof of Funds documentation to verify that potential immigrants have enough money to support themselves immediately upon arrival into the country. This is a form of guarantee stating that visa applicants can access and spend money for various essential expenses, including food and shelter.
Although these two use cases may seem unrelated at the surface level, both are situations where one party needs to display to another that they have enough liquid capital at their disposal to make good on a previous agreement.
Why home buyers need Proof of Funds
There’s a lot of trust involved in most real estate transactions — trust between buyers and lending institutions, trust between Realtors, and, of course, trust between buyers and sellers. The latter is precisely the reason Proof of Funds are such an important part of the closing process.
Unlike financial institutions, sellers don’t have easy access to potential buyers’ records or credit scores. This lack of information puts them in a vulnerable spot during the period between initial signatures and a fully closed deal, especially when they’re selecting one offer out of a pool of potential buyers. It’s not uncommon for a potential deal to fall through and for sellers to be left with a stale listing.
In addition to helping the buyer get pre-approved for a loan, Proof of Funds shows the seller that the buyer is sufficiently financed to follow through on the purchase. With all the finances in order, both parties can turn to their real estate lawyers to begin the closing process.
What to include in a Proof of Funds letter
When it comes to filling out a PoF letter, potential buyers need to contact a representative from their bank to draft the document. This is essential as it provides objective verification that the buyer currently possesses the requisite funds. Here’s what needs to be included in a Proof of Funds letter:
- The name and address of the financial institution
- Official documentation from the financial institution
- A money market statement showing the account balance
- The balance of funds in applicable savings and checking accounts
- A certified statement from the financial Group
- The signature of an authorized financial professional
Once certified by an authorized banker, the buyer then sends the official PoF document to the seller's agent or legal professional to continue finalizing the sale.
Difference between Proof of Funds and other documents
PoFs are sometimes mistaken as other pieces of documentation that are relevant to carrying out a home purchase or sale. While all are necessary for the eventual closure of a real estate deal, similar official documents verify other components of a buyer’s finances — things like mortgage pre-approval and proof of transfer documents.
However, the Proof of Funds document only signifies that a particular sum of money is in the buyer’s account and is legally available to them for the down payment and closing. Although PoF documents are required in some cases to authorize a home line of credit, they are separate from pre- and full-authorization documents.
Here’s what some of the similar documents refer to:
Proof of Deposit: This is like the official receipt for the PoF. It’s certified by the same financial institution, but it verifies that funds have been transferred from one account to another— from the buyer to the seller, for instance.
Pre-approval letter: Pre-approval is the initial evaluation process where a lending institution determines whether a potential buyer has sufficient credit, financial standing, and employment to secure a mortgage. The pre-approval letter is later delivered to a seller as verification that the buyer is being backed by a lending institution and is able to follow through on their purchase offer.
All three of these documents — Proof of Funds, Proof of Deposit, and Pre-Approval Letters — are essential for closing a real estate sale. Not only do they authorize the movement of money, but they also signal to the seller that the buyer in question is trustworthy and financially responsible enough to follow through on this major transaction.