Financing and buying a house can be a complicated process, especially when multiple lenders are involved. Buyers must agree with sellers on the selling terms while also making sure their lender gives them the necessary home loan to purchase the property. Sellers are eager to see proof that the borrower already has loan approval from a lender and is only waiting for the buyer to make a decision on the mortgage. One type of proof that buyers use when negotiating is a proof of funds.
A proof of funds is a specific statement that says the buyer has enough funds to purchase the property he's trying to buy. This typically takes the form of a letter that an organisation creates or signs. If the buyer is depending on a mortgage, then the proof of funds must be obtained from a mortgage broker or lender. If the buyer is using a large amount of cash, a proof of funds letter may also be necessary from the bank where the buyer keeps the necessary cash.
In a short sale, the seller's lender agrees to let the seller put the house on the market rather than proceed with a foreclosure. This means the seller's lender has a measure of control in the selling process and negotiates with the buyer on price and terms. The seller's lender is often determined to make sure the buyer actually has the funding to purchase the house, so a proof of funds may be required.
Cash transactions, or transactions where the buyer is making a large down payment, are also scenarios in which a seller asks for a proof of funds letter, especially if the seller is a bank. Buyers may be desperate to get a home and say they have enough money for a cash transaction --- which is appealing to both banks and individual sellers --- when their funds are actually tied up in other transactions.
A proof of funds document is only one type of document that a seller may request. Sellers may be satisfied with a simple bank statement that they can corroborate. A mortgage commitment letter is a more in-depth process that requires the lender to appraise and inspect the home before agreeing to make the mortgage. Even a home equity line of credit can be a useful financing tool to convince a seller that the buyer has enough funds to complete the transaction.