By James McGrath
When you’re making offers on properties in NYC, you’ll sometimes be asked for proof of funds. This can mean a few different things depending on the terms of your transaction and what the seller is actually asking for. Yoreevo walks you through the basics.
Table of Contents:
What is a proof of funds letter and why do you need it?
Do I need a letter from a bank and what should it say?
How do you get a proof of funds letter?
What can I use as proof of funds?
Can I use a 401k as proof of funds?
Can I use a bank statement as proof of funds?
Example/Sample of a proof of funds letter
A proof of funds letter (also called "verification of deposit") shows the seller you have the funding necessary to purchase the property including any closing costs. Sellers will require this before they commit to move forward with your offer. Without it, anyone could make any offer on any property.
It is much more common for an all cash offer to require proof of funds because there is no pre-approval. If you are financing the property and have a pre-approval, presumably your lender checked to make sure you actually have 20% to put down. An all cash offer has no third party oversight so sellers are justifiably more skeptical.
A proof of funds letter should certify the balance(s) of your account(s) as well as what type of assets are held in each. It may also include the most recent statement(s) and comes from the financial institution which holds your assets. In all likelihood, that means a bank. If you will be contributing funds from multiple sources, it’s okay to also have multiple letters.
In Yoreevo’s experience in NYC, a pre-approval will almost always satisfy a seller if you are financing.
If you ask your bank representative for a proof of funds letter, they should know what to do. The likely have a template and can edit it as necessary. If they don’t, they can simply fill out the sample letter we have included below.
Your bank should be able to put together a proof of funds letter in a day or two (max). If you walk into your local branch, you should be able to get it the same day.
For proof of funds, cash is best because you can transfer it easily and it won't change in value. Money market funds will also be considered as cash by most sellers.
A close second is stocks as they are also liquid (you just need to sell them) but they go up and down each day. If you’re right on the edge of being able to afford a property, the seller may ask that you sell your stocks before accepting your offer. They don’t want to take on the risk of a market meltdown prior to closing.
You can try to use other types of assets as proof of funds but the seller will discount them. For example, if you have a certificate of deposit (CD) that matures next year, the seller will factor in the penalty charged to redeem it early.
In almost all situations, a 401k cannot be used as proof of funds because it is not readily accessible and you will pay penalties for an early withdrawal.
That being said, if you have told the seller you plan to liquidate your 401k to make the down payment and you will have enough left after paying penalties, it could work. Even in that situation, they will likely not accept your offer until you’ve actually made the redemption. They will not want to take the risk that you underestimate the penalty or come across some other unforeseen issue.
Please keep in mind that using 401k savings to purchase real estate is exceptionally rare and usually a bad idea. You should consult with a financial advisor if considering going this route.
In NYC, it’s very common for a simple bank statement to be used as proof of funds as it includes all the same information as a letter from your bank - your name, balance and asset breakdown. Even better, it’s available immediately.
In other markets, you may be expected to provide a formal letter from a bank but if you are purchasing an apartment in NYC, including a bank statement with your offer will likely suffice.
259 W 4th St #19
New York, NY 10014
August 24, 2019
To whom it may concern,
This letter is to certify that Buyer Sally has been a customer of Yoreevo Bank since 2013. She currently holds a checking account with a balance of $X and a savings account with a balance of $Y. All funds are in cash.
Her full account statements are available upon request. If you would like copies or have any other questions, please find my contact information below.